Financial issues are among the leading cause of problems between couples, with financial stress cited as the second leading cause of divorce after infidelity. It comes as no shock that many couples going through a divorce might also need to file for bankruptcy.
Dealing with the two is among the most stressful and emotionally draining situations you can go through. However, if you want to file for divorce but have significant debt, filing for bankruptcy might be your only way out. That said, should you consider Divorce or bankruptcy first?
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You can incur substantial debt while married, and when you opt to get a divorce, these debts can be hard to pay off on your own. In such a case, filing for bankruptcy might seem like the best option. However, you need to understand how these two events affect each other before making this decision.
Filing for bankruptcy won’t stop your divorce proceedings, but it can delay asset distribution until the case is discharged. Many opt to file for Chapter 7 bankruptcy because it’s quick and takes a short while to complete. It liquidated your assets, wiping out qualifying debt, and you don’t need to repay your creditors through a repayment plan. You only get to keep property or assets you need to live and work.
In case of a divorce, your asset distribution will be affected as the bankruptcy proceedings create an automatic stay on asset division. This affects your bankruptcy trustee’s ability to sell off any assets not protected by exemptions to repay your debts. If you file for Chapter 13 bankruptcy, both you and your spouse are responsible for the three- to five-year repayment plan, which can also affect your divorce plans.
Before beginning either of these processes, understand it’s unlikely they will happen simultaneously. You can file both cases simultaneously, but one will take precedence over the other. Whichever it is will depend on your financial situation and the laws that apply where you live.
When to file for bankruptcy first
That said, there are instances when filing for bankruptcy is the best option before divorcing your partner. The biggest perk of going to bankruptcy court before divorce is the potential of getting marital debt that would be divided up canceled. This way, each one of you tackles it separately in your bankruptcy cases. A joint debt petition requires cooperation between spouses. But, it can significantly streamline the divorce proceedings and reduce the time and legal fees spent while allowing you to keep a large chunk of your assets after divorce.
When to file for divorce first
The biggest reason to file for divorce before bankruptcy hinges on your state’s Chapter 7 bankruptcy qualifications. Unlike Chapter 13, which cancels certain types of debt but requires working out a repayment plan, chapter 7 cancels all qualifying debts altogether. To qualify for chapter 7, your income must fall under the state median, and in homes where one spouse earned most if not all of the income, filing for divorce can allow you to file for chapter 7 bankruptcy individually.
How to decide: divorce or bankruptcy first
It’s not advisable to file for a divorce or bankruptcy simultaneously, and the order you choose to do so can affect your finances significantly. That’s why when deciding what to do first between filing for bankruptcy or initiating the divorce process, it’s vital to know the factors affecting your choice. They include:
The type of bankruptcy you file
Chapter 7 liquidates all your assets and can be completed quickly. This allows you to discharge all your debts after getting your divorce. However, to qualify, you must pass a means test, and your combined income might decrease your chances of making the cut. As for Chapter 13, waiting for a while before getting divorced can benefit both parties. The repayment plan can take anywhere from three to five years to complete, meaning the bankruptcy won’t get discharged until you finalize the divorce. You could choose to file for chapter 13 after getting divorced because of the resulting obligations such as alimony or child support. These will be considered while drafting the repayment plan and can reduce your monthly payments.
The costs involved
There are specific costs linked to filing for bankruptcy before and after getting divorced, and these can affect which proceeding goes first. Filing fees for a joint bankruptcy case are the same as what you would pay as an individual; however, filing jointly before the divorce can reduce the costs per person. It can also hasten your divorce settlement proceedings by simplifying debt division or eliminating the need for it.
Filing for bankruptcy first before divorce decreases the chances of leaving one spouse liable for debts incurred by their partner and are not bound by the divorce decree, such as credit card debt. This means that creditors can continue to hound the other spouse for payment despite these debts being assigned by court order to one spouse. That is why you should solve liabilities through bankruptcy before getting divorced.
Conflicts in interest
You might want to put off filing for bankruptcy until your divorce is finalized to prevent conflict of interest. Your interests might be better served by a different chapter depending on your income, assets, and liabilities. Additionally, if you are in a high-conflict relationship, remaining objective through bankruptcy proceedings can be difficult, making it nearly impossible to pay off the debts and get the case discharged.
If you and your spouse have decided that divorce is the best option, your finances will be affected. However, if you or your spouse files for bankruptcy instead, it’s imperative to get legal advice on your options regarding divorce and bankruptcy. In some cases, it would be best to file for bankruptcy before and in others after.
What will work for you will depend on where you live, how much debt you have if you have any property and the kind of bankruptcy you wish to file. At Van Horn Law Group, we are ready to help you figure out the best course of action for your situation. Talk to us today and discover how to proceed with your divorce and bankruptcy cases.