Divorce and Bankruptcy often go hand in hand. Given that the leading cause of divorce is financial trouble, so when a couple divorce, neither spouse can, individually, assume the financial responsibilities of the household. As a result, one or both spouses end up filing bankruptcy. The question posed here is whether there is any benefit to filing bankruptcy before or after the divorce? Which should you do first, the bankruptcy or the divorce?
The Division of Debt in Divorce can be a hurdle to moving forward
If a married couple has debt, the divorce court must divide that debt just like it divides the assets. This division of debt is rarely equal and usually results in one spouse being assigned to pay most of the joint debt and some of the individual debt of the other spouse. What everyone (including some divorce attorneys) fails to realize is that a divorce decree does not modify the agreement with the bank. So, although the divorce decree may assign Joe to pay the couple’s joint credit card with Chase, Jane is still on the hook to Chase. When Joe doesn’t pay, Chase calls Jane asking for money; Jane’s credit score goes in the toilet, and the sky falls. Jane invariably freaks out, wonders why Chase is calling if the divorce decree assigned the debt to Joe, then starts making calls to see if her attorney committed malpractice. Sorry Jane, but he didn’t. A family court cannot modify the terms of Chase’s agreement with you and Joe. Put another way, the divorce decree is between only you and Joe. A bankruptcy before a divorce can alleviate this scenario.
When to File Bankruptcy Before Divorce?
Assuming the couple can still work together, if the marital estate is primarily debt-laden and they would otherwise qualify, a chapter 7 bankruptcy prior to divorce is the best move. A primarily deb laden estate simply means that the couple has few, if any, truly valuable (non-exempt) assets and is carrying significant debt. The bankruptcy before the divorce cleans up the couple’s debt picture thereby allowing for a cleaner divorce. The divorce court won’t need to assign debt and it is one less issue to fight over. The pre-divorce bankruptcy also alleviates the risk of a spouse not paying on joint debt after the divorce.
All things being equal, a pre-divorce bankruptcy is best done as a joint bankruptcy. Only married couples may file a joint bankruptcy. As such, a pre-divorce joint bankruptcy is more cost effective as it is one bankruptcy versus two bankruptcies. Most cases call for a pre-divorce bankruptcy.
When to File Divorce Before Bankruptcy?
Sometimes a spouse will have no choice but to file a post-divorce bankruptcy. A post-divorce bankruptcy is advisable if the marital estate has valuable (non-exempt) assets. A chapter 7 bankruptcy is an asset liquidation. In reality, few people lose any assets in bankruptcy. However, if the marital estate has at risk assets (that the couple wants to keep), then it is better to let the divorce court divide the assets and then file bankruptcy. Usually, after the divorce court divides the assets, each individual spouse will then be able to file bankruptcy with little risk to said assets.
The other reason you would need to do a post-divorce bankruptcy is if the marital estate has too much income to qualify for chapter 7 bankruptcy. The couple may not be able to do a pre-divorce joint bankruptcy due to too much income, but each individual spouse will likely qualify for an individual chapter 7 bankruptcy after the divorce.
(Almost) Never File a Joint Chapter 13 Bankruptcy Before Divorce
A chapter 13 bankruptcy is a 36 to 60-month payment plan. I think you can figure out why that would be a bad idea before a divorce. In the divorce, an agreement would be needed about how chapter 13 is going to be paid. You are creating an even bigger mess.
The only time you would file chapter 13 prior to divorce is in an emergency such as imminent home foreclosure. Even in that scenario, you want to work with an attorney to come up with an end-game scenario about how the bankruptcy will work and whether it is truly feasible to do a chapter 13.
Bankruptcy and divorce often go hand in hand. It would be great if couples could manage their differences and not divorce. However, debt is an evil burden and stands in the way of a divorced individual cutting the knot and moving on. A bankruptcy is tailor-made for helping an individual get a fresh start whether before or after divorce.