Bankruptcy and Divorce
Of the many different reasons individuals choose to get divorced, finances are often one of the major reasons cited.
If a couple is going through a difficult financial situation, they may not only be on the verge of separation or divorce but also bankruptcy. In fact, these two legal areas often intertwine.
How the Two Areas Affect Each Other
For most purposes, bankruptcy takes legal precedence over divorce. By filing for bankruptcy during the pendency of a divorce, this filing can delay the court’s ability to distribute the marital assets and debts until the bankruptcy matter is concluded.
If a bankruptcy case is filed before the divorce is finalized, that bankruptcy case needs to be taken care of first and foremost. The two different cases cannot be completed simultaneously.
If the couple is still married at the time the bankruptcy case is filed, they are both jointly liable for the debts involved. Their income is also affected since the bankruptcy courts will treat income different depending on whether the parties are married, separated or divorced when the case is filed.
Therefore, timing out when the bankruptcy case is filed is of extreme importance and should be planned carefully.
Should Bankruptcy Be Filed Before Divorce?
Every situation is different. It’s important to discuss your unique case with an attorney to decide what option is best.
If the parties are still on relatively decent terms, filing for bankruptcy first may be the best choice. Filing jointly will allow all of the debts of the marriage to be consolidated under one bankruptcy case. This means the spouses can wipe out their joint debts together.
In addition, as a married couple, they will be able to increase their exemption amounts allowed in bankruptcy. If one of the spouses makes the majority of the family income, filing jointly will help that spouse’s chances of filing for Chapter 7 bankruptcy, as well. If the parties have a large amount of debts that neither party is in the financial situation to pay for and these debts are mostly unsecured, including credit cards or medical bills, filing jointly for Chapter 7 may be the best decision.
A Chapter 7 case will only take a shorter time to complete, and after the case is complete, then the parties can divorce without having to deal with debts that would otherwise qualify for discharge under bankruptcy.
If the parties only qualify jointly for Chapter 13 bankruptcy, it would be wise to file separately after divorce since these cases tend to take a much longer time, up to five years, depending on the repayment plan.
Another benefit to filing for bankruptcy before filing for divorce is it does save the couple on legal fees if they both would end up filing for bankruptcy in the end. Rather than pay for an attorney to handle each of their separate bankruptcy cases, they would pay one joint bankruptcy attorney and only one filing fee.
Should Divorce Be Filed First?
If the joint income of the parties together is too high to qualify for Chapter 7 bankruptcy, it may make more sense for parties to divorce first and then file for bankruptcy.
For instance, if the spouse who will be receiving the majority of the debt has a much smaller income than the other spouse, it may make more sense to divide the debt up accordingly in the divorce settlement only for the spouse receiving responsibility for the debt to file singularly for bankruptcy.
When it comes to determining whether to go ahead and file for divorce or pursue the alternative first, this decision requires proper planning and discussion with both a divorce attorney but also a bankruptcy attorney.
Many factors need to be kept in mind, including the income of both parties, whether one party wants to take a major asset, like the house, in the divorce, whether judgment with proper transfer of title or mortgage can protect the ex-spouse from creditors, etc.
In addition, if the parties choose to file for divorce first, this decision will allow for support considerations. If the spouse owes a great amount of support, knowing this amount first will prove to be helpful before filing for bankruptcy.
For instance, if the spouse wishes to pursue Chapter 13, knowing this support amount will be key in determining the bankruptcy repayment plan for purposes of knowing his or her income.
Does Bankruptcy Discharge Domestic Support Obligations?
One important key fact to keep in mind is that even if the parties choose to file for divorce first, followed by one spouse filing for bankruptcy later, if that spouse has a domestic support obligation, including child support or spousal support, these obligations will not be discharged through bankruptcy.
However, if the spouse falls behind on support payments, a Chapter 13 repayment plan will allow him or her to catch up on past due payments through the three to five-year plan.
Contact A Divorce Lawyer Today
To discuss how bankruptcy will factor in your divorce, please contact family lawyers at Scott M. Brown and Associates. You can reach us by calling (979) 318-3075 or completing our online form. We have offices in Angleton, Webster/Clear Lake, and Pearland.