Financial strain is often cited as one of the main reasons marriages fall apart. Along with infidelity, addiction and irreconcilable differences, money woes are a leading cause of divorce in the United States.
So, it’s not unusual for a couple to be facing both divorce and bankruptcy. Both are emotionally loaded, and each brings its own weighty logistical issues. Put together, they can feel like an overwhelming ordeal. But with some planning, you can smooth and streamline the process and make a new start as quickly as possible.
There are three important —and interconnected—factors in deciding when and how to file for both bankruptcy and divorce.
- Which should come first—divorce or bankruptcy?
- What kind of bankruptcy will you file for?
- Chapter 7: liquidates non-exempt assets to repay part of your debt
- Chapter 13: establishes a debt repayment plan spread over three to five years
- Will you file jointly or individually?
There isn’t one simple answer to whether you should file for bankruptcy before or after your divorce—there are pros and cons to both. However, you should know that during the divorce is rarely the best option—as a general rule, don’t try to do both at the same time.
Although bankruptcy proceedings do not impede custody or child support actions, they can delay and complicate other processes. When you file for bankruptcy, all non-exempt property becomes part of the bankruptcy estate. A stay goes into effect that prevents the judge in your divorce case from making decisions about the division of property.
Filing for bankruptcy before your divorce:
If you and your spouse can cooperate, you’ll save money by filing jointly. The fee for filing for bankruptcy is the same whether you do it as a couple or an individual, so it’s cheaper to file together and split legal costs.
Chapter 7 bankruptcy will discharge (wipe out) qualifying debt for both partners in only three to six months. This can help you move your divorce along quickly.
In a typical divorce, the court will divide both assets and debts, so discharging debt ahead of time can simplify your settlement as there will be less to divide.
On the downside, if you and your spouse each have separate incomes, filing jointly may put you over the threshold for Chapter 7 bankruptcy and you won’t qualify.
Filing for bankruptcy after your divorce:
If you and your spouse are not on amicable terms, it may be best to file bankruptcy after your divorce to avoid having to work together through thorny financial issues.
Filing separately may also mean that you each qualify individually for Chapter 7 bankruptcy (even if your combined income was too high) and you can quickly discharge debt when your divorce is final and your assets have been divided in family court.
If you plan to file for Chapter 13 bankruptcy, it may be better to finalize your divorce first so that you do not remain financially entangled for three to five years after your split.
However, filing separate bankruptcy petitions means you’ll each pay individual legal fees, which will be higher than if you filed together.
An important caveat about filing for bankruptcy after divorce: the division of debts decided by the court in a divorce does not impact creditors. If one spouse is ordered in the divorce settlement to pay off a joint, unsecured debt (such as a shared credit card), and after the divorce, that person files for bankruptcy, the discharge of the debt overrides the family court’s order to pay it. But that debt does not just vanish! The creditor can no longer pursue the individual who filed bankruptcy, but they can still go after the ex-spouse to collect on the debt.
It’s also important to know that some types of debt, such as student loans, child and spousal support, taxes and government fines are non-dischargeable whenever you file.
With so many complex issues to sort through when navigating bankruptcy and divorce, it’s important to choose an attorney who specializes in complex asset division. The attorneys at SFLG help clients establish priorities, choose their battles, and secure their fair share of the estate, so they will emerge from the divorce in the most beneficial financial position.
By Debra Schoenberg