Divorces, Finances, and Bankruptcy
Divorce is unquestionably one of the most emotionally exhausting experiences life can throw at you. If you and your spouse have decided to get a divorce, it will have a serious impact on almost all areas of your life.
One of the biggest areas where it will leave a lasting impact is on your finances. Figuring out how your assets are going to be redistributed, reaching agreements, and going to court, all take a lot of time to sort through.
The process can become even more complicated if you’re filing for bankruptcy on top of divorce. In fact, divorce is cited as the leading cause of bankruptcy filings. When the timing of these two events overlaps, it’s important to understand how one affects the other so that you can carefully navigate the situation.
When you are facing divorce and bankruptcy at the same time, it can be incredibly overwhelming. It may seem like getting them both over with at the same time is the best route to take. However, this can make your situation immensely more complicated. It’s best to pick one to see through to completion before moving on to the next.
With that in mind, which one should you take care of first?
Filing For Bankruptcy First
As a general rule of thumb, people will typically file for bankruptcy before filing for a divorce. There are a lot of reasons why this would be the advisable route to take, especially if you and your spouse are on relatively good terms.
By filing for bankruptcy while you’re still with your spouse, you can split the cost of hiring an attorney and handling the fees associated with the process. Also, if you own property together, filing for bankruptcy with each other could even protect you from having to pay for the joint debt. Contracts that neither of you wants, like expensive car loans and mortgages for an undervalued house, will also be done away with by filing for bankruptcy. So rather than having to argue over who ends up with these problematic contracts in divorce court, they can be removed beforehand by filing for bankruptcy first.
Joint bankruptcy also allows you the possibility of double exemptions, depending on which jurisdiction you fall under. This means that if you have a property exemption valued for $20,000, the double exemption would exempt the property up to $40,000, benefiting both you and your spouse. Since the laws on this vary by your region, make sure you consult with a local bankruptcy attorney first.
After you file for bankruptcy, regardless of whether it’s a Chapter 7 or Chapter 13 bankruptcy, an “automatic stay” will be into effect. This means that your assets and properties will be frozen and creditors will be prevented from contacting you. This is done so that the court can complete the bankruptcy filing process without any interference or unexpected changes.
Because this hold isn’t lifted throughout the entire bankruptcy process, it can cause issues when filing for a divorce at the same time. During the divorce filing process, assets have to be distributed and divided up. However, during the automatic stay, this process can’t run the way it is supposed to. As result, the divorce process will take significantly longer. The last thing you want to do is drag out what is already sure to be an emotionally and financially taxing experience.
Filing For Divorce First
Filing for divorce before bankruptcy also has its own benefits, though in most cases filing for bankruptcy first will better option of the two.
A situation where you would want to file for divorce first is if you make too much income to qualify for Chapter 7 bankruptcy. Chapter 7 bankruptcy normally takes less than 90 days to complete, so filing for it first (if possible) is much less time consuming than Chapter 13. If it’s not an option, however, and you have to file for Chapter 13 bankruptcy, the process will take significantly longer, dragging out the amount of time before you and your spouse can finalize the divorce.
Also, if you and your spouse are on fairly bad terms, going through with the divorce first might be better. Having someone who is actively trying to obstruct and complicate the bankruptcy process can make it even more of a nightmare than it already is. So if you think it would be in your best interest to keep your ex-spouse out of the bankruptcy filing, do so.
Filing for divorce first also gives you the opportunity for child support considerations. If you file for bankruptcy after child support terms have been set, then the court can factor that into their plan for managing your bankruptcy filing. If you file for bankruptcy before settling child support terms, you could end up stuck in a bankruptcy plan that no longer works for your change in income.
Managing Chapter 7 Bankruptcy During Divorce
Chapter 7 bankruptcy is a liquidation method for handling bankruptcy that absolves most of your unsecured debts. These debts include things like credit card debt or medical bills.
This method is better suited for individuals working through a divorce situation because it is much faster. In three or four months, all of the proceedings could be finished, allowing you and your ex to each move on with your lives.
Keep in mind, however, that not all debts are eliminated through this method of bankruptcy. If a debt is deemed “non-dischargeable” then it is ineligible for forgiveness by the court. You and your ex will still be responsible for paying this debt back. Student loans, alimony, child support, court fines or penalties, and attorney fees for child support/custody cases are some examples of the kinds of debts that might be considered non-dischargeable.
Even if you don’t have any debts that fall under these examples, other debts can still end up being non-dischargeable. Whether or not a debt will be prevented from being discharged depends on the circumstances surrounding the debt. The court considers having your debts discharged a privilege rather than a right. There are no guarantees over what will be discharged and what won’t.
As a debtor, you are subject to the Bankruptcy Code, which is a list of rules debtors must abide by. If you fail to meet these rules, then your debts that previously may have been dischargeable are likely to be denied. Reasons you could have your discharge request denied include:
- Violation of a court order
- Destruction of financial records
- Failure to complete a mandatory credit counseling course
- Failure to provide requested documents
- Hiding property with the intention of defrauding creditors
- Committing perjury in relation to your bankruptcy case
To maximize the number of debts that you can have discharged, consult with your bankruptcy attorney thoroughly, and abide by these rules.
Managing Chapter 13 Bankruptcy During Divorce
Chapter 13 bankruptcy filings can take 3 to 5 years to complete, allowing plenty of time for major life changes to take place, like divorce. Handling a divorce during Chapter 13 bankruptcy can be extremely difficult, and requires careful planning. This form of bankruptcy involves creating a long-term payment plan to cover all of your debts.
For starters, your bankruptcy attorney might have to withdraw. Attorneys are not allowed to represent clients that have a conflict of interest with each other. So if the court decides that your divorce counts as a valid conflict of interest, your attorney will have no choice to withdraw. You and your spouse should both talk to your attorney first to see how it might impact the proceedings.
A good course of action is to keep paying your payment plan with your ex. If the two of you can reach an agreement on how to split the payments up, then you can stay on track to complete your current bankruptcy plan.
You might also be able to convert your Chapter 13 bankruptcy to a Chapter 7 plan. This is because now that you and your ex are now paying for separate bills on your own, your individual disposable income may have decreased enough to qualify your case for Chapter 7. Again, talk to your bankruptcy attorney about this, and see if they think this is a good option for your individual case.
If your attorney thinks converting to a Chapter 7 case is a bad idea, then you could also possibly renegotiate the terms of your Chapter 13 filing on the basis that you each have less disposable income now.
If you and your ex are on particularly bad terms, and you no longer want to work through the bankruptcy together, you could also choose to “bifurcate” the bankruptcy. This essentially means that separate your bankruptcy into two completely separate plans so that you no longer have to work together on the payment plan or future proceedings. From there, you can individually decide whether or not to convert to a Chapter 7 case depending on your circumstances.
Filing For Joint Bankruptcy
If you and your spouse agree to file for bankruptcy before filing for a divorce, you file your bankruptcy as a joint bankruptcy.
A bankruptcy can be filed by an individual, a married couple, or a business. When a married couple submits for bankruptcy, they do so using a joint petition. This petition contains the financial information of each individual in one set of documents, treating the two individuals’ debt as one case.
This can be beneficial to you and your spouse when you are divorcing because it is a much more efficient process. The work that needs to be done is essentially halved. If you file for this kind of bankruptcy prior to divorce, you can potentially eliminate all of your shared debt through a Chapter 7 case. This way, instead of having to sort through who will end up with which debts, neither party will have to carry the burden of the debt.
It also costs significantly less to file jointly. Not only are the associated fees going to be lower, but you’ll be splitting the cost of an attorney. Just make sure that your bankruptcy attorney is aware that you are on track to be divorced after the bankruptcy has been completed.
Property division is also simplified when you file jointly. You have the possibility of a double exemption (depending on your district). If you and your spouse own a lot of property together, this could add up to a high amount of exemptions, which would benefit both parties.
Married couples are not required to file together, however. Depending on how well you and your spouse get along, how much property you own, and how you would each like to handle the proceedings should be carefully considered before deciding to sign a joint petition.
While the process is financially and emotionally stressful, always keep a clear head, and think about what is in your own best interest. Acting spitefully or irrationally in this kind of situation can have long-term negative effects on your finances in the future.
In most cases, filing for bankruptcy while you and your spouse are still together is a good idea, so long as the two of you can work together on the subject. If you need to, though, divorcing before filing for bankruptcy is navigable as well.
And if possible, opt for a Chapter 7 filing, unless your attorney advises otherwise according to your circumstances. This will expedite the process greatly and allow each of you to move on with your lives faster, which in the end is the ultimate goal. If you are in the middle of a Chapter 13 bankruptcy when you and your spouse decide to get a divorce, keep your attorney closely involved so that you don’t undo several years worth of work.
The most important thing you can do when filing for divorce and bankruptcy at the same time is to communicate thoroughly and frequently with your attorney and ex. If the three of you work together and reach logical agreements, you can minimize the negative effects of what is already likely to be a difficult and emotional process. Every situation is different, and your bankruptcy attorney will be able to guide you on the best course of action to take given your circumstances.
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