Bankruptcy and divorce are often linked. Financial problems are cited frequently as reasons for marital issues that eventually lead to divorce. However, recent studies have revealed that it is only the primary factor in a low number of divorces. In some cases, divorce itself can lead to a bankruptcy filing as marital money issues turn into insurmountable debt for one or both parties. The questions surrounding the timing of a divorce and bankruptcy are significant. The couple has the option to file for bankruptcy before the divorce, during the divorce or after the divorce. They also have to decide whether to file separately or jointly. Both processes are interrelated and the timing of one affects the proceedings of the other.
Divorce or Bankruptcy First?
If bankruptcy is on the table when a couple is preparing for divorce, then it is usually easier to file for bankruptcy first. Bankruptcy simplifies the debt and property distribution process, usually lowering the costs associated with divorce as a result. Furthermore, if a bankruptcy is filed during the divorce, any property or debt allocation will be put on hold. Typically, there is no way to go through both procedures at the same time. As long as a couple is on relatively civil terms, it may make sense to file for a joint bankruptcy before filing for divorce. A joint filing in certain states allows the couple to double the exemptions as well.
If one spouse decides to file for bankruptcy during the divorce proceedings, the divorce will automatically be put on hold due to the automatic placed on actions involving the filer’s finances. A spouse can also file for a single bankruptcy on their own if the other spouse refuses to join the action or is not in contact. However, because debts are usually shared, creditors can go after the other spouse for the discharged debt. If one spouse wants to file for bankruptcy after divorce, it should be understood that they would be unable to discharge any spousal support or child support debts.
The two types of bankruptcy are Chapter 7 and Chapter 13. Chapter 7 bankruptcy discharges most unsecured debts. For example, the process removes a filer’s liability for credit card debt, utility debt and medical bills. Income rules apply to a Chapter 7, however, so if the filer’s income is too high, then that person may be required to file for Chapter 13 instead. Alternatively, the couple can wait until after the divorce and file for Chapter 7 individually if their new income meets the criteria.
Chapter 13 bankruptcies put debt into a payment plan that can last up to five years. For this reason, Chapter 13 bankruptcies should be filed after a divorce and on an individual basis. If a couple files for a Chapter 13 before a divorce and then enters divorce proceedings, both spouses are responsible for the repayment. Further, they will likely be prohibited from dividing assets through sale.
Property Division and Debt Allocation
Discharging debts through a joint bankruptcy ultimately simplifies the property distribution aspect of a divorce. Certain states allow couples to double exemptions in joint filings, which can have an effect on when the parties choose to initiate proceedings. If the state does not allow double exemptions and the couple has more property than can be exempted in a joint bankruptcy, then it may be better to file individually after the divorce and property division.
Litigating debts in a divorce is one of the most costly and time-consuming aspects. In addition, if one spouse is ordered to pay a certain debt, it does not modify the other spouse’s obligation to that creditor. For example, if one spouse is ordered to pay on a joint debt and that spouse either does not pay or then files for bankruptcy, the other spouse may still be liable for the outstanding balance. Discharging debt before a divorce may be in the best interests for both parties.