Divorce is a life-altering experience for most people. Spouses need to complete much paperwork, negotiate various disputes, attend court hearings, etc., all while dealing with emotional worries caused by a breakup. However, things get even more complicated if spouses have to manage divorce and bankruptcy at the same time. A marriage dissolution process will not only become more legally intricate but can take twice as much time as a simple divorce.
In this article, we are going to study the correlation of bankruptcy and divorce in detail. Some couples decide to apply for divorce first, and once it’s finalized, they proceed with bankruptcy filing. Others take the opposite approach and start a bankruptcy case before ending their marriage officially.
We will focus on the pros and cons of each scenario, shed light on the interplay of bankruptcy and divorce in terms of time spent, define differences between Chapter 7 and Chapter 13 bankruptcy types, and provide insights into bankruptcy and family law. Keep in mind that this article serves an informative purpose only. You can read it to understand your options if you have faced divorce and financial troubles, but make sure to contact a certified lawyer to get legal advice for your specific case.
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Filing for Bankruptcy After Divorce Has Advantages, but Filing Before Is Simpler
If you wonder, “Should I file bankruptcy before or after divorce?”, you should understand that there is hardly an answer that can suit every couple. The decision of whether to initiate a bankruptcy case before or after official marriage dissolution depends on spouses’ preferences and their unique situation. Below, you can see the core advantages and disadvantages of filing bankruptcy before divorce and the pros and cons of the opposite option.
Advantages of filing bankruptcy before divorce:
- Shared legal fees. When spouses are on amicable terms and file a joint bankruptcy petition, they can significantly lower their expenses. They will divide the costs of court filing, legal representation, if needed, and other related expenses equally.
- Simpler & quicker process. By addressing finance-related difficulties before starting a divorce, spouses can expedite the process. They can solely focus on bankruptcy and temporarily forget about the legal disputes of a marriage dissolution, e.g., child custody and support, alimony, etc.
- Elimination of joint debt. If a married couple has shared debts, they can get rid of them during bankruptcy proceedings. Thus, a future divorce process may be smoother because they won’t argue about who pays debts.
- Fresh financial start. When conflicts about joint funds are resolved, every spouse fully understands what money they own and can develop a plan of how to use it.
Disadvantages of filing bankruptcy before divorce:
- Complex legal coordination. Money-related issues and other marital debates will be resolved at the same time, which can be very complicated and exhausting.
- Potential delays in a divorce case. When filing for bankruptcy before divorce, you risk prolonging your marriage dissolution. Bankruptcy cases can take much time, postponing the beginning of divorce proceedings.
- Possible loss of non-exempt assets. Some of your valuable possessions, called non-exempt assets, may be used to pay off the money you owe.
- Lower chances to apply for Chapter 7 bankruptcy. If a couple files for bankruptcy before getting a divorce and spouses make a lot of money, they may not qualify for Chapter 7 bankruptcy. Instead, they will have to go through a more complex process called Chapter 13 bankruptcy. It is more time-consuming and involves paying back some debts in the future.
Advantages of filing for bankruptcy after Divorce
- Individual discharge of debts. After divorce, each spouse is typically responsible for their own debts. So, when they file for bankruptcy when being officially divorced, they don’t need to deal with the complexities of joint debt and related problems.
- Protection for post-divorce assets. Houses, vehicles, and other things that ex-spouses buy are considered separate property. Such items are neither included in the bankruptcy estate nor subject to division when the parties apply for bankruptcy after divorce.
- Timing flexibility. You can choose the most convenient time to deal with your money problems after your marriage is dissolved. It can be especially important for people who have undergone an emotionally taxing divorce process and want to have a respite before filing for bankruptcy.
- No joint decision complexities. After a divorce, you no longer have to make important decisions about money together with your ex-spouse and can decide how to manage finances on your own.
- It is easier to qualify for Chapter 7 bankruptcy. To be allowed to apply for this type of bankruptcy, you need to earn a sum that is lower than the median income for a family of the corresponding size in your state. The calculations are made for the preceding six months. When you are divorced, the court considers only your personal income, so you are more likely to meet eligibility criteria.
Disadvantages of filing for bankruptcy after Divorce
- Higher court expenses. When filing bankruptcy after divorce, you need to pay filing fees again. Besides, you and your ex-spouse may need to hire individual lawyers and go through another legal process after the marriage dissolution.
- Loss of joint bankruptcy benefits. When people are still married and file for bankruptcy together, they can deal with expenses and debts jointly. But if they start a bankruptcy case separately after getting divorced, they can no longer take advantage of such possibilities.
- Asset division challenges. When ex-spouses file for bankruptcy after a divorce, there is a special bankruptcy court that gains authority over certain aspects of how assets are distributed. The decision on assets division during a divorce may not coincide with the decisions of a bankruptcy court. The bankruptcy court may have a say in which assets are used to pay off debts and how they are distributed among creditors.
How Can Bankruptcy and Divorce Affect Each Other?
When filing for divorce and bankruptcy at the same time, spouses have many things to take care of. Both processes can have a significant impact on people’s well-being, financial state, and post-divorce life. So, you should be extra mindful of their succession and timing.
You may have heard such complaints as “Divorce bankrupted me.” Is it possible, or the person is simply overreacting? To answer this question, we’d better consider the potential impacts of marriage dissolution and bankruptcy on different spheres of partners’ lives.
- Property Division
When filing for a divorce, spouses usually have their joint assets and liabilities divided between them. In some states like Arizona, California, Idaho, etc., the division is done according to the community property laws, which means a 50/50 split. Other states, including Alabama, New Jersey, Ohio, etc., stick to an equitable distribution, aiming for a fair but not always equal division.
If spouses also have to deal with bankruptcy in addition to marital issues, their situation may become more problematic to settle. Filing for bankruptcy before divorce may help discharge joint debts. Thus, the division of assets will be smoother. But if one party files for bankruptcy after divorce, the other may have to manage unresolved debts. For example, if there is a house with an outstanding mortgage that is classified as joint property, filing for bankruptcy before divorce may allow for a more equitable resolution.
- Spousal Support
Though the number of divorces when one party requests alimony has dropped over the years, it is still a financial consideration in approximately 10% of marriage dissolution cases. This issue may be difficult to resolve by itself, and bankruptcy will add even more legal complexities to the process.
If a divorce is pending and the court considers alimony claims of either party while the other party files for bankruptcy, divorce proceedings may be temporarily put at a halt. The divorce review will continue after official court decisions on bankruptcy are made. However, spousal support obligations are often non-dischargeable in bankruptcy, unlike some other debts that can be eliminated. If the supporting party files for bankruptcy after divorce, the alimony amount may be reviewed and reduced, but it won’t be excluded.
- Child Support
If people applying for divorce have minor kids, they need to reach an agreement on child support. In contested cases, child support decisions are made by the court in the best interest of the children. Typically, bankruptcy doesn’t discharge child support obligations. If bankruptcy precedes divorce, the financial reshuffling may impact child support obligations, but can’t totally cancel them. If the paying parent files for bankruptcy after divorce, child support remains a priority payment, but it can be lowered in accordance with the payer’s financial capacity.
- Debt Allocation
Spouses often need to handle various debts, e.g., loans, mortgages, and business debts, during their divorce. No wonder bankruptcy has a pivotal influence on how such debts are allocated when it accompanies marriage dissolution. If a couple finalizes their bankruptcy proceedings before pursuing a divorce, they may discharge a significant portion of their debts.
The situation is different when bankruptcy follows divorce. Typically, a divorce decree contains a clear explanation of the responsibilities of each spouse regarding their debts. However, bankruptcy can alter these arrangements. If one spouse discharges joint debts through bankruptcy, the other party may become solely responsible for paying them.
Can you file for bankruptcy during divorce? Yes, you can. But before doing that, you should carefully evaluate the possible consequences and probable complications described above. In general, it is easier to finish one process and then start another one. If you aren’t sure whether it is better to get a divorce and then file bankruptcy or the other way around in your specific case, consult an attorney who understands the bankruptcy laws in your state.
Chapter 7 vs. Chapter 13 Bankruptcy
People facing the double challenge of simultaneous divorce and bankruptcy usually choose between Chapter 7 and Chapter 13 bankruptcy types. What happens if you get divorced during a Chapter 13 bankruptcy? Is a Chapter 7 bankruptcy better? Check out the table below to understand what option is more suitable when you are going through a divorce.
| Aspects | Chapter 7 | Chapter 13 |
| Liquidation of Assets | Non-exempt assets are liquidated for debt repayment. | Assets are retained. The court establishes a structured repayment plan over 3 to 5 years. |
| Debt Discharge | Many unsecured debts are discharged. | Some debts can be discharged after spouses complete a repayment plan successfully. |
| Timeline | The procedure is quicker than the alternative option. The timeframe between getting Chapter 7 and a divorce decree is usually 3-6 months. | It lasts 3 to 5 years, as spouses have to cover their debts according to the developed repayment plan. |
| Income Eligibility | Couples with high incomes may not qualify to file this type of bankruptcy. | It is suitable for partners with a stable income who can commit to a repayment plan. |
| Impact on Joint Debts | Joint debts may be discharged, affecting the other party’s liability. | Joint debts should be managed as part of a structured repayment plan. |
| Divorce Decree Influence | It has a direct impact on the division of assets and debts in divorce proceedings. | It may be necessary to change the existing repayment plan in accordance with the terms of the Chapter 13 divorce decree. |
| Mortgage Obligations | “How does chapter 7 affect your mortgage with an ex?” is one of the most popular search queries. In general, it relieves the discharged debtor from personal liability. It directly impacts mortgage dynamics and property division, particularly when the ex-spouse intends to retain ownership of the property. | If spouses get a divorce during Chapter 13 bankruptcy, they have to keep paying the mortgage, and creditors are prohibited to go after any co-debtors during this time. |
Now you know the core differences between Chapter 7 and Chapter 13 bankruptcy types. To make an informed choice, follow these recommendations:
- Consult with a bankruptcy attorney
To have a clear picture of your divorce situation and how bankruptcy claims can affect it, contact a divorce lawyer with bankruptcy specialization. An expert can answer all your questions, suggest possible legal steps to take when you are separated and a husband filed Chapter 7 bankruptcy, as well as help you develop a winning strategy for the upcoming court proceedings.
- Review joint assets and debts
Consider the amount of shared assets and debts. What assets do you want to preserve? How can you cover your joint debts? Are your debts secured or unsecured? Discuss the situation and all crucial factors with a partner to figure out which chapter suits you best.
- Assess income eligibility
To file Chapter 7 bankruptcy, you need to comply with income limits. Spouses with higher incomes may have to choose Chapter 13. Thus, they will have a comprehensible repayment plan created based on their financial stability.
- Define long-term goals and plan for the future
Think of your priorities and aspirations. Are you seeking financial independence with the discharge of unsecured debts? Then go for Chapter 7. If you want to preserve assets and live by a structured repayment plan over several years, Chapter 13 may be a better fit.
Marital Settlement Agreements and Bankruptcy
A marital settlement agreement is a legally binding contract completed by spouses. It plays an important role both in the cases of divorce and bankruptcy. A marital settlement agreement can consist of different sections based on the features of the case and outlines the rights and responsibilities of the parties, serving as a guideline in their post-divorce life.
Usually, a divorce settlement agreement contains the terms and conditions of a marriage dissolution, including how shared assets and debts will be divided, who will have legal and/or physical custody, who will pay child support and how much, whether alimony is required, etc. A divorce property settlement agreement allows for minimizing potential conflicts. With a settlement agreement, divorce can be finalized faster, as spouses already agree upon all the issues.
In the context of bankruptcy, an MSA is used to delineate spouses’ financial responsibilities and obligations. Bankruptcy courts scrutinize a bankruptcy discharge settlement to determine which debts are dischargeable and how assets are allocated to ensure the agreements comply with bankruptcy laws. A detailed and properly written martial settlement agreement can protect one spouse from the other’s bankruptcy repercussions and establish a clear framework for addressing financial matters after divorce.
When writing a marital settlement agreement, it is paramount to be clear, comprehensive, and specific. Besides, you should:
- Outline the desired division of assets and specify each party’s rights and responsibilities.
- Define alimony and child support terms.
- Clarify how joint debts will be handled, whether through debt repayment plans or other methods.
- Address issues related to health, life, and property insurance. Determine which party is responsible for maintaining coverage.
- You may add clauses that define how potential bankruptcy filings will impact the marital settlement agreement terms. These may include provisions for automatic modification if either party files for bankruptcy.
- Reach out to a lawyer. An expert will review your contract and suggest corrections if needed.