Best Approach to Bankruptcy and Divorce
Divorce and bankruptcy are painful life events that are an unfortunate reality of life. In fact, many people cite divorce as a leading reason for filing bankruptcy. However, with proper planning, you can make your bankruptcy and your divorce less complicated, less expensive and ultimately less painful.
Filing for bankruptcy before or after a divorce depends on where you live, how much property and debt you have, and the type of bankruptcy you decide to file.
Bankruptcy and Divorce Costs
Bankruptcy filing fees are the same for joint and individual filings, so filing a joint bankruptcy with your spouse before a divorce can save a lot on court fees. If you decide to hire a bankruptcy attorney, your attorney fees will likely be far lower for a joint bankruptcy than if you filed individually. However, you should let your bankruptcy attorney know about the impending divorce as there may be a conflict of interest in representing both of you.
Filing for bankruptcy before a divorce can also simplify the issues regarding debt and property division, potentially lowering your divorce costs.
Chapter 7 or Chapter 13 Bankruptcy?
A Chapter 7 is a liquidation bankruptcy to get rid of your unsecured debts such as credit card debt and medical bills. In a Chapter 7, you usually receive a discharge after only a few months. So it can be completed quickly before a divorce.
In contrast, a Chapter 13 bankruptcy lasts three to five years because you have to pay back some or all of your debts through a repayment plan. So if you were looking to file a Chapter 13, it may be a better idea to file individually after the divorce because it takes a long time to complete.
Division of Property
Wiping out your debts jointly through a bankruptcy will simplify property division in a divorce. However, before filing a joint bankruptcy, make sure that your state allows enough exemptions to protect all property you own with your spouse.
Some states allow you to double the exemption amounts if you file jointly. So, if you own a lot of property, it may be a better idea to file a joint bankruptcy. If you can’t double your exemptions and you have more property than you can exempt in a joint bankruptcy, it may be better to file individually after the property has been divided in the divorce.
Also, keep in mind that if you file bankruptcy during an ongoing divorce the automatic stay will put a hold on property division until the bankruptcy is completed.
Litigating which debts should be assigned to each spouse in a divorce can be costly and time consuming. Further, ordering one spouse to pay a specific debt in a divorce decree does not change the other spouse’s obligations toward that creditor.
For example, let’s say your ex-husband was ordered in the divorce to pay a joint credit card. If he doesn’t pay it (or files bankruptcy), then the creditor can come after you to pay the debt. If you end up paying the debt, you can be reimbursed because of violation of the divorce decree. This holds true even if they filed bankruptcy because they can discharge an obligation to pay the creditor but cannot discharge obligations to you under the divorce decree.
However, trying to collect from your ex will usually mean spending more money in court. As a result, it is in both spouses’ best interest to file bankruptcy and wipe out their combined debts before a divorce.
Income Qualification for Chapter 7
If you intend to file a Chapter 7, the decision to file before or after a divorce can come down to income if you maintain a single household. If you wish to file jointly, you must include your combined income in the bankruptcy. If your joint income is too high, then you might not qualify for a Chapter 7.
This can happen even if each spouse’s income individually is low enough to qualify on his or her own. This is because Chapter 7 income limits are based on household size and the limit for a household of two is not twice that of a single person household (it’s usually only slightly higher). In that case, it may be necessary to wait until each spouse has a separate household after the divorce to file bankruptcy.
For a more detailed explanation of your divorce/bankruptcy options, let’s schedule a consultation today.
Moshier Law Office, PLLC
St. Paul, Minnesota