Bankruptcy and Divorce — Navigating the Complexities

It’s not uncommon for divorcing couples to also research their options for debt relief. According to a 2018 survey by Ramsey Solutions, money issues are the top cause of conflicts among spouses. 

But if you’re thinking about filing for both divorce and bankruptcy, it’s important to understand your options. Making the wrong choice or not filing in the correct order could have enormous financial and other negative consequences. On the other hand, there may be benefits to approaching these items a certain way. Here’s what you need to know to navigate these complexities. 

How Different Types of Bankruptcy Impacts a Divorce

When filing for personal bankruptcy, you have two options — Chapter 7 and Chapter 13. Chapter 7 bankruptcy requires that you satisfy a “means test” and will take about 3-4 months to complete. Once done, you can discharge the debts included in the bankruptcy prior to the divorce. 

However, many couples find that their joint income is too high for them to qualify for Chapter 7. In other words, they won’t meet the means test. This type of bankruptcy might also require liquidating some assets to repay debts. 

Chapter 13 is a different type of bankruptcy, which is more of a debt reorganization. You create a repayment plan lasting 3-5 years to repay a portion of your debts. Choosing this option would tie you financially to your spouse for several years to come. 

Ways Bankruptcy and Divorce Courts Handle Property

Addressing your debt situation through bankruptcy can simplify the property division process in a divorce. However, it’s essential you understand how exemptions in your state work so you can protect as much property as possible. For example, some states allow you to double the exemption amount if you file jointly. If you can’t double your exemptions, it might make more sense to file separately. 

How Bankruptcy and Divorce Courts Handle Debt

Litigating which debts each spouse should be responsible for in a divorce can be a time-consuming and costly process. Also, assigning the debt to one spouse through a divorce decree doesn’t necessarily relieve the other’s obligations. For example, if your ex was ordered to pay off a certain joint credit card and they didn’t do it, the creditor can still pursue you for full payment. 

One of the benefits of handling bankruptcy is that debts get addressed first. Spouses can address their debt situation by discharging joint debits and eliminating unwanted contracts, like underwater car loans or mortgages. You also get the benefit of an automatic stay, which prevents creditors from making harassing phone calls or sending letters and emails to collect debts. 

Should You File Bankruptcy Before Divorce?

If you qualify for Chapter 7 bankruptcy, it’s often beneficial to file for bankruptcy before divorce. While this will delay your divorce proceedings by several months, it makes more financial sense to choose this option. But couples who can’t pass the Chapter 7 means test or who simply can’t work together any longer may need to wait until after the divorce to address their debt issues through bankruptcy. 

What About Getting Divorced Before Filing for Bankruptcy?

Some couples might find that it makes more sense to file for and finalize their divorce first and then deal with bankruptcy separately. Maybe one of you wishes to file for Chapter 13 bankruptcy because it will allow you to keep more property. Or you may not be able to pass the means test for Chapter 7 bankruptcy as a couple, but you can pass it individually after your divorce. 

There are also many instances where the lines of communication between divorcing spouses have become so broken that cooperating in a bankruptcy proceeding just isn’t possible. The potential downside to waiting until after you divorce, however, is important to understand. Specifically, if one spouse is able to get a discharge of joint debt, creditors may be able to pursue the other for the full amount of the debt. 

Is Filing for Both at the Same Time a Good Idea?

The one thing you want to avoid is filing for bankruptcy and divorce simultaneously. Both cases will impact each other, particularly when it comes to property and debt. This is more likely to cause repeated delays, especially in your divorce proceedings. 

Bankruptcy is one of the many debt relief options divorcing couples should consider when there is unmanageable debt. But it’s never a good idea to jump into a complex legal process like bankruptcy without understanding the facts. An experienced bankruptcy attorney can explain your options and guide you through this process. This ensures you are making sound decisions that will help you get a fresh financial start.