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Bankruptcy and Divorce: The Chicken or the Egg?

Posted by Kevin Chern

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It can be a very difficult choice to make – filing for divorce. However, the situation becomes even more complicated when there is financial difficulty within the relationship. If you are getting ready become separated, the thought of imminent bankruptcy and the accompanying debts can be overwhelming for most. This is one of the reasons that clients often ask whether they should file for divorce first or file for bankruptcy first.

Not a simple answer
Right away some readers are going to become frustrated, because the answer to that question is rather ambiguous – it depends. It depends on the willingness of both parties to “resolve” the situation and the particular circumstances of the separating parties. The financial picture of the person involved is also going to play an important role in the situation. There are specific federal bankruptcy guidelines that apply to married parties as it relates to assets, debts, dependents, and income.

Issues to consider
There are a number of different factors that you have to consider before deciding what to do first. By going through a few of the considerations, you are going to be able to have an idea as to what might be your best option.

Income of the parties
If both parties continue to live in the same household and have a significant income, it can be difficult to qualify to file a joint Chapter 7 bankruptcy before filing for divorce or separating because the court will consider the total household income. Your attorney can discuss with you whether it makes sense to separate prior to filing for bankruptcy and how filing your bankruptcy with your joint income could affect your case. If the parties are already divorced or living in separate households, your income will be considered individually, since the “household” income will not include the former spouse’s income.

Both parties have to agree to file bankruptcy
It might not be possible to have a joint filing if the parties do not agree on filing for bankruptcy. Remember that a spouse is not required to file for bankruptcy, and it is nearly impossible to force bankruptcy upon someone or have it forced upon you during a divorce. However, the party who wants to file for bankruptcy may still be eligible to do so individually even if the other party objects. It might be advisable to file for bankruptcy before the divorce so that both of you can get a fresh start and move on, but filing jointly requires the consent of both parties.

Do specific conflicts require separate filings?
In many cases, there are multiple joint debts such as a home or a car where one party wishes to keep the asset and the other wants to remove their obligation for paying for it. If there is a conflict in this particular situation, separate bankruptcies may be required. In some cases, it may make more sense for one partner to file for Chapter 13 while the other one files for Chapter 7. The way that specific debts are allocated, joint, separate, or marital may play a factor as well. Certain states also have laws that we sometime refer to as “community property” laws, which can both limit options and open door under certain circumstances; each of which needs to be discussed with your UpRight Law Bankruptcy attorney to best determine how your case may be affected.

Looking at the spouse’s separate property
In some cases, one of the parties has a substantial amount of separate property through an inheritance, a gift, or something that was accumulated before marriage. In this particular situation, the other party may wish to file for bankruptcy without involving the partner who has the substantial property. In order to determine whether the filing spouse would be better off filing before or after the divorce, you have to look at how the debt is allocated.

Are there prior bankruptcy filings?
If there is a previous bankruptcy with either spouse, he or she may not be eligible to file for bankruptcy at that time. The party may be eligible again later. This could affect the current case whether or not a discharge was granted as a result of the prior case. Courts are wary of allowing too many bankruptcies within a short period of time and waiting to file can be required if certain conditions are satisfied. To know whether any of these conditions apply to your case, please consult your UpRight Law bankruptcy attorney.

Divorce and the Automatic Stay
If you are already in the midst of a divorce and are filing bankruptcy, the automatic stay could potentially delay the process of getting your divorce decree. During a bankruptcy, all of the debtors’ property becomes property of the bankruptcy estate unless it has been specifically exempted using the available statutes in the jurisdiction where you live. This means that this property cannot be divided in any property settlement until permission is received from the bankruptcy judge or the bankruptcy is over. The bankruptcy probably won’t impact divorce matters such as parenting time, custody, spousal support, or child support – it focuses solely on the division of property. Even though it may sometimes be necessary to file for bankruptcy during a divorce, keep in mind that it may slow down the process a bit.

The costs of bankruptcy and divorce
Whether you file jointly or individually, the filing fees for bankruptcy are going to be the same, although when you file separately, you each will have to pay a filing fee. Also, keep in mind that most legal professionals will charge the same or within a few hundred dollars whether you are filing as a married couple or a single person. After the debt is gone, there will be no more arguments about the apportionment of debts between spouses. This should lower the overall divorce costs. If possible, most lawyers will recommend that you file jointly before the divorce is finalized so you can avoid the legal fees fighting over who has to pay the debt and you can save money on the bankruptcy representation by only having to file one case.

Remember that a couple that is still married (even if they are not living together) are able to file for bankruptcy together. They can no longer file together after the divorce. If necessary, two cases might need to be filed. If you file before the divorce, you are able to save a filing fee as well.

Bankruptcy and alimony
Typically, it is not possible to discharge an obligation for alimony (maintenance) during bankruptcy. However, if the divorce decree stipulates an obligation as alimony but this is not in the nature of alimony (think a marital debt for example), this might be dischargeable through bankruptcy. If assigned to a third party, an alimony obligation may also be dischargeable. The laws of the jurisdiction where you live will determine whether any domestic support obligation is dischargeable.

Get your situation in order
As you can see, there is a wide range of different facts that you have to consider beforehand. This means that before you decide upon a divorce attorney or a bankruptcy attorney, you will need as many facts as you can possibly get. The more accurate and complete the information is that you can provide, the better the assessment of your particular situation is going to be. It is important to engage an experienced attorney during these critical times – especially because it CAN be such a challenge to determine where to start. If you have debt issues that merit bankruptcy consideration and are in the process of thinking about divorce, make sure that you get everything in order first.

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Posted on June 24th, 2015


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