Dealing With Bankruptcy and Divorce at the Same Time

Apr 27, 2021 | Bankruptcy, Divorce

Dealing with bankruptcy and divorce during the same stage in life can be rather challenging. To keep things as simple as possible, it is best that you don’t overlap both. More often than not, couples who are in this predicament opt to file for bankruptcy before going through their divorce. While this might work well for most, whether you should file for bankruptcy before or after divorce boils down to individual circumstances.

Should You File for Bankruptcy First?

If you and your spouse can go through bankruptcy proceedings harmoniously, filing for bankruptcy first might work well for you. One of the biggest advantages of doing this is that you get the ability to cancel joint martial debts that would otherwise be split during divorce proceedings. It lets both spouses share filing fees and attorney costs. Depending on where you live, you might even benefit through doubling exemption amounts.

When Might Filing for Divorce First Be a Better Idea?

One scenario in which you might benefit by filing for divorce first involves meeting state-specific income requirements to qualify for Chapter 7 bankruptcy, as per which you need to earn less than the median income of your state. If your total income exceeds this threshold, filing for divorce first might enable you and your spouse to qualify for Chapter 7 bankruptcy as individuals once the divorce proceedings are complete.

What Happens to Marital Debt?

Determining who will be responsible for which debt during a divorce proceeding can be time-consuming and expensive. Besides, while a divorce decree might order one spouse to pay a particular joint debt, the other spouse still remains obligated toward the creditor.

Consider this – your ex-spouse is ordered to pay a joint debt after your divorce. In case he/she does not pay it, you’re still responsible for the debt, and you might start receiving collection calls. While you have the right to get reimbursed by your spouse upon repaying any such debt, pursuing that matter might mean heading back to court. If you do take the matter to court, your spouse will be held liable even if he/she has filed for bankruptcy, because the divorce decree takes precedence.

How Does Division of Assets Happen?

Getting rid of your debts together through a joint bankruptcy filing simplifies division of assets during a divorce. While several states give couples the ability to double exemption amounts, not all do (California does not). If you own considerable property, filing for bankruptcy before divorce might give you means to double your exemptions.

If the state you live in does not give you the option of doubling your exemptions, and if you have more equity in your property than can be exempted, you might benefit by filing for divorce first, provided you get ownership of the property. You may then get to hold on to the property when you file for bankruptcy.

The Exemptions

Depending on where you live, you might get to hang on to different assets through homestead exemption, motor vehicle exemption, personal property exemption, as well as exemptions surrounding wages, retirement/pension plans, pubic benefits, and insurance.

What’s Not Exempted?

Bear in mind that bankruptcy does not discharge all financial obligations. The common types of non-dischargeable obligations include:

  • Fines and penalties you need to pay to government agencies
  • Court fines and penalties
  • Child support and alimony payments
  • Attorney fees incurred during child support/custody cases
  • Student loans

Conclusion

Couples who plan to divorce should consider filing for bankruptcy only after they have explored all other debt relief alternatives. If you and your spouse can agree to work together in handling your joint financial matters, the road to rebuild your finances can become considerably smoother. If you’re still unsure about whether you should file for bankruptcy or divorce first, consider speaking with an attorney as soon as possible.

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