5 Things To Know about Bankruptcy and Divorce

5 Things To Know about Bankruptcy and Divorce

By Lauren Bennett

Divorce can be draining on your emotions and affect your life more than you imagined. If bankruptcy is piled on top of it, it can become even more stressful. If you and your spouse have made the decision that divorce is your best option, your finances could be affected, as divorce is commonly cited as the leading cause for bankruptcy filing. If you and your soon-to-be ex-spouse are considering filing for both divorce and bankruptcy, there are several options for you. Before filing for either, here are some important facts you should know:

1. Don’t file for divorce and bankruptcy at the same time

For the sake of simplicity, the two legal matters shouldn’t overlap with each other. Commonly, people choose to file bankruptcy before going through with a divorce – and there are several logical reasons for that. Once bankruptcyis filed, for both chapter 7 and chapter 13, an “automatic stay” is put into place. The automatic stay halts creditors from contacting you and puts a freeze on your assets and property – this is so the bankruptcy court can begin sorting out what debts you owe and what assets you have that can help compensate for some of it. This hold is effective throughout the bankruptcy process.

Now let’s say, you filed for bankruptcy and then immediately filed for divorce, causing the two to overlap. Since a large part of the divorce process is splitting up assets (among other more complex tasks), the automatic stay would make it virtually impossible for the family court to access and divide the assets, since they are put into a hold. Because of this, the divorce could be dragged out longer than necessary and become more emotionally stressful for you or your loved ones.

2. Which one you should file first depends on your situation

Although you shouldn’t file bankruptcy and divorce at the same time, you can still choose which process to take care of first. While it is ultimately up to you, there are a few things to consider before determining which to file first. If you and your spouse are on amicable terms, it may be best to first file bankruptcy. Filing bankruptcy first allows you both to share the cost of attorney and filing fees and could possibly protect you from paying joint debt – which could be beneficial if you and your spouse own property together. 

Some jurisdictions also allow double exemptions on assets if you file joint bankruptcy; for instance, if your home is exempt up to $50,000 with a single bankruptcy, some jurisdictions could allow a double exemption, allowing the home to be exempt up to $100,000. Since exemption laws vary from district to district, it’s always beneficial to consult a bankruptcy attorney in your area to see what options are available for you. Filing for bankruptcy first also simplifies the division of assets in divorce because they are typically divided during the bankruptcy process – although they can sometimes change. 

If you and your spouse choose to file for chapter 7 bankruptcy, your joint income might put you over the income threshold for filing. If your individual incomes are below the threshold, you may want to explore the options of filing for divorce before bankruptcy.

3. Chapter 7 is ideal for a quick divorce

One of the benefits of chapter 7 bankruptcy is the timeline of the process. Chapter 7 eliminates all dischargeable debt typically within three to six months, allowing you to file your divorce sooner if you choose to file bankruptcy first. In comparison, chapter 13 bankruptcy sets up a three- to five-year payment plan instead of completely eliminating debt, and can possibly drag your divorce or separation out longer than necessary. 

If you are involved in a chapter 13 bankruptcy and decide to file for divorce during the repayment period, you can choose to cancel or restructure the bankruptcy plan. By canceling, you agree to stop the agreed upon payment plan; however, all debt you and your spouse have assumed will still be your responsibility. If you choose to restructure the plan, it divides the plan into two cases – one for you and one for your spouse; you can then handle the bankruptcy separately from your partner. These cases can become complex if not handled properly and can cause a lengthy divorce if anything goes awry. It’s always best to speak with a bankruptcy attorney to see the best course of action for your situation.

4. Not all debts are included in bankruptcy

If you choose the route of eliminating all debt (chapter 7), it’s important to remember that not all debts can be eliminated or discharged. Debts that are deemed “nondischargeable” cannot be forgiven in the bankruptcy process, and you are still responsible for paying them back. The most common types of nondischargeable debts include:

  • Alimony
  • Child support
  • Fines owed to government agencies
  • Student loans
  • Court fines and/or penalties
  • Attorney fees for child custody or support cases 

In addition to the debts that are outright nondischargeable, there are other ways certain debts can be barred from discharge. In a chapter 7 bankruptcy, dischargeable debts are considered a “privilege” more than a right, and debtors must abide by the rules listed in the Bankruptcy Code for the bankruptcy court to approve a debt discharge. If the debtor fails to follow these rules, the court may deny their debt discharge request. The chapter 7 discharge may be denied if the debtor:

  • Fails to provide requested tax documents
  • Hides property for the purpose of defrauding creditors
  • Destroys financial books or records
  • Commits perjury in connection to the bankruptcy case
  • Violates a court order
  • Fails to complete a mandatory credit counseling course

There are numerous rules and regulations regarding nondischargeable debts; the best way to determine which debts you can expect to have discharged is to meet with an experienced bankruptcy attorney to review your case.

5. If you file bankruptcy during a divorce, you may need to hire a new attorney

If you and your spouse hired a divorce attorney together, you may need to begin searching for a new one. If you, or your spouse, decide to file for bankruptcy during your divorce proceedings, your divorce attorney cannot represent both of you. This is due to the fact that attorneys are barred from representing clients that have a conflict of interest with each other. Filing for bankruptcy creates a conflict for the attorney because his or her clients are now opponents in another legal matter. 

This can become a burden because of the time and effort it takes for one or both parties to find a new attorney and update them on the case so far. It also means that you and your spouse will be paying separate legal fees, creating a financial burden as well.

Bankruptcy and divorce are chances for a fresh start for you, your ex, and your families. By knowing these aspects of the two, you can make a more informed decision and come out stronger than ever. However, both of these processes can be extremely detailed and complex, and should not be handled without experienced bankruptcy and divorce lawyers on your side. It’s always best to consult with a lawyer that can help guide you through the process and get the outcome you deserve.

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