What You Need To Know About Bankruptcy and Divorce

Many couples blame their money troubles for causing them to get a divorce. However, financial problems don’t go away for most couples after a divorce. Married couples in serious debt have to deal with their money issues before or after a divorce. Bankruptcy can be a good option to help individuals get a fresh start.

Divorcing couples can file for bankruptcy jointly or separately. If the debt is mostly in one spouse’s name, they can file for bankruptcy alone. Bankruptcy falls under federal law, but your property rights depend on state law. For legal advice about bankruptcy and your divorce, talk to a local divorce attorney.

Understanding Bankruptcy and Divorce

Bankruptcy is a way to reduce your debts and stop creditor harassment with an automatic stay. Financial debts and property acquired during marriage have different treatment, depending on where you live. Marital debt and property treatment depend on whether you live in a common law or community property state. This can affect whether you want to file for bankruptcy before or after a divorce.

Common Law and Community Property Debts

Most states follow common law for property and debts. In these states, debts incurred by one spouse are separate from the other spouse. Debts from before the marriage also generally stay with the original spouse. However, debts and liabilities in the name of both spouses are marital debt.

For example, if your spouse took out a credit card in their name, that spouse has the credit card debt. If you have a car loan in both of your names, you both share the marital debt.

In community property states, debts acquired during the marriage are marital debts shared by both partners. Even if your spouse took out a loan, you are 50% liable for the debt. However, debts from before the marriage are generally separate.

For example, if you have student loans from before the marriage, the student loans remain your separate debt. However, if you and your spouse refinance your loans during marriage, they can change to marital debt.

Types of Bankruptcy: Chapter 7 vs. Chapter 13

The most common types of bankruptcy for individuals are Chapter 7 bankruptcy and Chapter 13 bankruptcy. Your bankruptcy options depend on your debt, income, and whether you qualify.

Chapter 7 bankruptcy is the most common type of personal bankruptcy. With a Chapter 7, a trustee takes control of your non-exempt assets and liquidates them, giving proceeds to creditors. After a bankruptcy is over, it clears all dischargeable debts. To qualify for Chapter 7, you have to pass the means test.

Chapter 13 bankruptcy is a wage earner’s plan. Chapter 13 reorganizes your debts. The bankruptcy court approves a repayment plan to make full or partial repayment of unsecured debts. At the end of the repayment plan, the remaining debts are discharged.

Chapter 7 bankruptcy generally takes less than 6 months, and Chapter 13 can last 3 to 5 years. With Chapter 7, non-exempt assets are sold to pay creditors, though many filers can keep most or all of their property through exemptions. Chapter 13 lets you keep most of your assets. Talk to your bankruptcy attorney to see what kind of bankruptcy debt relief is best for you.

Bankruptcy Property Exemptions

State bankruptcy exemption laws protect some types of property from creditors. The largest asset and liability for most married couples is their home. States with homestead exemptions allow couples to keep some or all the equity in their home away from bankruptcy proceedings. There are other exemptions, including for clothing, furniture, jewelry, and other personal assets. However, exemptions vary from state to state. Some states provide little or no protection.

Timing Bankruptcy and Divorce Filings

Timing is everything when filing for bankruptcy and divorce. Timing depends on your particular financial situation. Factors to consider if you file your divorce case or bankruptcy first include:

• Shared and joint debt amounts
• Joint and shared assets
• Reasons for divorce
• Separate and combined income
• Type of bankruptcy filing
• Eligibility for bankruptcy
• How well you get along with your spouse

If you both have joint and separate debt, filing for bankruptcy jointly can be more cost-effective. You can have one bankruptcy lawyer represent your bankruptcy estate instead of two, which can save you money in legal fees. It also saves on filing fees. Filing joint bankruptcy could be faster than filing separately. In some states, married couples have more state exemptions than filing separately.

If your joint income and debts do not qualify for the means test, you can’t file Chapter 7 bankruptcy jointly. You may need to finalize the divorce for one or both spouses to qualify. If one spouse holds most of the debt, filing after divorce will protect the other spouse’s property and credit rating.

If you cannot get along with your spouse, it may be impossible for you to work on a joint bankruptcy together. The stress of bankruptcy can be overwhelming if you are already struggling with your spouse. To decide what’s best for you, talk to a divorce lawyer and a bankruptcy law attorney.

Impact on Asset Division, Alimony, and Child Support

When you file can impact your divorce. In a divorce, couples have to decide the division of property, spousal support, and child custody. Dealing with debt before or after divorce can change assets, liabilities, alimony, and child support.

Division of assets divides property and liabilities between the ex-spouses. The court can allocate debt and assets equitably if the couple doesn’t decide how to handle their property. If they divorce after finalizing bankruptcy, it will reduce their debts, but it could also reduce their assets. If they file for divorce first, each spouse can consider bankruptcy, depending on their individual situation.

Alimony and spousal support depend on several factors. Factors the family law court considers include individual income, assets, employment prospects, and the length of the marriage. Bankruptcy can make a big difference in the supporting spouse’s assets.

Child support is generally based on the parents’ incomes. Personal debts, such as credit cards or personal loans, usually aren’t considered when calculating child support obligations. This means that high debt does not usually lower the required payment. After a divorce, the custodial parent could ask the family court to modify the child support orders and increase payments.

Debts and Liabilities After Separation

Generally, debts and liabilities acquired after separation are individual debts. If you move out and tell your spouse you are filing for divorce, any new loans or debts are separate. Separating couples may have a lot of new expenses, including property rent, moving expenses, and attorney fees. Generally, each spouse will be responsible for any new debt incurred during or after separation.

Seeking Professional Legal and Financial Advice

Divorce law and bankruptcy law are very different types of legal practices. Unfortunately, many married couples have to deal with both bankruptcy and the divorce process at the same time. Get legal and financial advice before taking these major steps.

For legal advice about your divorce, contact an experienced divorce lawyer.