How to Handle Bankruptcy and Divorce at the Same Time

No one wants to go through a divorce or bankruptcy process. When a couple goes through both events at the same time, life can become overwhelming. While both may be anticipating a new and better beginning, this can be a difficult journey.

Should A Person File for Bankruptcy Before the Divorce?

A person can file for both proceedings; however, in the majority of jurisdictions, a divorce (and the division of any debts and liability it entails) needs to be completed before the bankruptcy filing can proceed.

It is easier to simply file for the divorce and settle all financial issues before taking on the bankruptcy. However, there are exceptions, and a divorce attorney, in conjunction with an accountant, will be your best advisors.

When Should Bankruptcy be Filed Before Divorce?

A bankruptcy may cancel marital debts for which both partners are responsible. This can reduce any joint liabilities that would be split between them during the divorce significantly, making the entire procedure easier and less time-consuming. In some states, if a married couple files for bankruptcy, each partner may be able to keep a greater share of the assets than if they had filed as individuals after the divorce.

When Should a Divorce be Filed Before a Bankruptcy?

If a couple plans to file for a Chapter 7 bankruptcy (instead of Chapter 13, which requires a debt restructuring), this may allow certain debts to be canceled entirely. However, Chapter 7 requires an income low enough to qualify, which will more than likely be the case if the partners file as individuals after the divorce.  

Credit Rating and Divorce

Whether the bankruptcy or divorce happens first, there will be likely repercussions to the couple’s credit standing.

For example, a Chapter 13 bankruptcy file could leave both parties responsible for the repayment of debts. In addition, bankruptcy will not eliminate or discharge certain types of liabilities, such as student loans. If either party co-signed such a loan, both may be held responsible for repayment after the divorce and bankruptcy filings.

Bankruptcy may bring momentary relief from debts, but the negative consequences will be severe, and the parties may struggle to qualify for loans and credit cards. Divorce itself has no consequences on credit scores, but a bankruptcy filing could lower such scores. The credit consequences can take years to repair and can be exacerbated if either party refuses to pay his or her court-ordered share of the debt.

Plan Ahead

If a couple knows that divorce and bankruptcy are imminent, it is best to plan and consult with a divorce attorney and bankruptcy accountant. This can ultimately save them a great deal of trouble and money.

Filing a single bankruptcy as a couple may be more efficient, as any qualifying debt for both parties can be eliminated and simplify both the bankruptcy and divorce process. This will reduce any division of debt issues during the divorce.

Bankruptcy and Divorce Expenses

Since the cost to file bankruptcy is the same for a couple or an individual, it might make sense to file as a couple and incur only one filing fee. This is something that should be discussed with a bankruptcy attorney to ensure that a pending divorce presents no conflict of interest to the bankruptcy filing.

File Chapter 7 vs. Chapter 13

The purpose of a Chapter 7 bankruptcy is to eliminate unsecured debts such as credit cards or medical expenses. This can be done fairly quickly before a divorce and streamline the division of assets and debts.

A Chapter 13 bankruptcy requires a debt restructuring and the repayment of all, most, or some of the debts involved. This can stretch out for several years, so filing for a Chapter 13 bankruptcy should probably happen after a divorce.

Joint Marital Debt

A court may decide which spouse is liable for certain debt payments. However, if that spouse refuses to pay or files a post-divorce bankruptcy, the creditor still expects to get paid, and the other spouse will be held responsible. If this spouse does make the needed payments, he or she has the right to demand reimbursement since the non-payment spouse violated the divorce agreement.

Conclusion

Filing for bankruptcy and divorce simultaneously may not be the best idea. If a couple knows that both events loom ahead, a discussion with a bankruptcy attorney is advisable. Keep in mind that certain debts, such as alimony and child support, will not be discharged through bankruptcy.

The legal process can get difficult, which is why we always recommend that you seek the assistance of counsel; or at least have a consultation. Schedule a consultation with one of our attorneys today to review the issues of your case, the legal options you may have, and certain rights that pertain to your unique situation.

Have more questions? Let us know by sending an email to: questions@legallotus.com and we will do our best to develop content to provide you with direction and insight!

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