Top 10 Important Facts About Bankruptcy and Divorce

Posted by David Falvey on Sunday, August 18th, 2019 - 6,398 views

If you’re going through a divorce and are considering bankruptcy, these 10 important facts about bankruptcy and divorce are a must read.

Spouses and parents going through a divorce and bankruptcy, often need to consult with both a bankruptcy lawyer and a family lawyer at the same time. Divorce and bankruptcy are both emotionally draining experiences.

A divorce means that a marriage has failed and it means worrying about your finances and the well being of your children. It could lead to bitterness and anxiety about relationships in general. A bankruptcy means you have had a hard time paying your bills on time – that you need help either discharging some debts or need more time to pay off your arrears.

It is double stressful to contemplate divorce and bankruptcy at the same time. The following are some of the key considerations you need to review with your attorneys when divorce and bankruptcy are both at issue:

1. The timing of the filings

As a general rule, it is best to file one action at a time, but not both.

• Either file the bankruptcy first and wait for a discharge or plan approval – and then file for the divorce, or;
• File the divorce first and then file the bankruptcy when all the divorce matters have been resolved.

It is usually a major risk, financially and emotionally, to file for both divorce and bankruptcy at the same time.

Generally, declaring bankruptcy first is probably the more logical option for several reasons:

• The filing of the bankruptcy acts aa an automatic stay on most collection actions. This gives you the time and energy to think about your financial situation and how it will affect your marriage or divorce.
• Bankruptcy helps to sort out a lot of your financial concerns. It helps by eliminating or reducing your unsecured debt – depending on whether your file a Chapter 7 or a Chapter 13 and depending on other factors.
• The family court itself generally needs the approval of the bankruptcy court to proceed – so it makes sense to let the bankruptcy proceed to a discharge or a plan approval first.
• Filing the bankruptcy first can also help the spouses protect their home which is often the most valuable asset in terms of economic value, and because it provides a place for at least one spouse and for the children to live.
• Filing for the bankruptcy first generally avoids the issue of who will pay for the bankruptcy. If both spouses file together, they normally pay from their joint funds.

2. Why you may want to file for the divorce first

Chapter 7 has a means test which examines your income. If your income is above the median for your family size and geographical location, you may be forced to file a Chapter 13 bankruptcy instead of a Chapter 7.

When couples file a joint bankruptcy, a joint income test is used. If your combined income is too high, it may be better to handle the divorce issues first, and then file separately when the divorce is finalized.

Part of this decision depends on whether both spouses are working, or just one spouse works.

3. Is the bankruptcy going to be a Chapter 7?

In a Chapter 7, the time frame from the date of the filing of the petition to the date of discharge is normally about six months.

The time frame for a Chapter 13 bankruptcy is three to five years.

Many couples can wait six months emotionally and for some couples, waiting three to five years may be unbearable.

Chapter 7 is also generally used for people who don’t have a home that they want to save.

If there’s no home, then there’s often not going to be a contest over the division of marital assets because the home is usually the biggest asset that is contested.

It’s more common and easier to fight over stocks, cash, and other benefits that can be more easily valued and easily sold.

4. Is the bankruptcy going to be a Chapter 13 bankruptcy?

A Chapter 13 bankruptcy is used if you want to save your house or other secured interests. Secured interests are loans that are backed up by collateral. The collateral for a loan to buy a house is your home. The security interest is called a mortgage.

Your car may also be secured, which means if you fail to pay your car loans on time, the lender can seek to repossess your car and sell it to pay off the loan.

In a Chapter 13 bankruptcy, you need to:

• Offer to pay all the arrears on any secured loans over a three to five year time span.
• Offer to pay the future mortgage payments or other secured loan payments as they become due.
• Offer to pay a percentage of the unsecured debts such as credit card debt or medical bills over the same three to five year period.

If you and your spouse file a Chapter 13 and then file for divorce, you will generally continue paying the repayment amounts until the divorce issues are resolved.

Once the divorce issues are resolved, then you and your spouse may need to ask the bankruptcy court to restructure your repayment plan so that you each file individual plans through separate bankruptcy cases.

Restructuring a repayment plan can be complex.

Additionally, when you are negotiating your divorce issues, you should keep your bankruptcy obligations in mind.

5. Is the divorce going to be a quick and quickly overdone with?

If there are no children, no home, and both spouses make a living, and both spouses agree that the marriage can’t be saved, then the divorce should normally proceed fairly quickly.

That is unless creditors are about to foreclose on a home or there’s some reason the bankruptcy can’t wait, and in that case it may be better to file for the divorce first.

If, however, the divorce is going to be contested by one of the parties, contests can take months or even years to resolve.

In contested divorce matters, then filing the bankruptcy first may be more logical.

6. The need to meet with both your bankruptcy and divorce lawyer

Normally, your divorce lawyer will not do also bankruptcy work, and your bankruptcy lawyer does not do divorce work.

Spouses who need help in both areas of law normally need to hire a separate lawyer for the divorce and another lawyer for the bankruptcy.

With both lawyers, you should let each of them know about the other.

In this way, your divorce lawyer and your bankruptcy lawyer can coordinate and plan so that you can get quality legal advice.

Additionally, spouses generally need to use family lawyers so there isn’t a conflict of interest.

Normally, couples can use just one bankruptcy lawyer if they file jointly.

If there’s a conflict between the interests of each spouse, then it may be necessary for you to use one bankruptcy lawyer and your spouse to use another.

This is why it is generally not a good idea to file both a divorce and a bankruptcy at the same time.

If one action is filed and completed before the other, you may reduce the need for multiple lawyers.

7. Which family debts are not dischargeable in bankruptcy

Some family debts and a few other types of debts cannot be discharged in a Chapter 7 bankruptcy.

At best, you might be able to repay any arrears, as of the court filing date, over a three to five year period.

Generally, all future child support and alimony payments must be paid through your family court as they become due. For the most part this cannot be altered although there are some situations where it can.

Alimony debts and child support debts cannot be discharged in bankruptcy with some limited exceptions.

Additionally, student loans, taxes, fines, and some other forms of debt are also not dischargeable.

See “Paying Alimony And Child Support Payments After A Bankruptcy” for more information

This means the debts must be paid after a Chapter 7 discharge and must be part of any Chapter 13 payment plan.

8. Personal exemptions

You may be able to double your personal exemptions.

In states such as Connecticut, the personal exemption for real estate is fairly large, so a joint filing can help save your home or help a couple preserve their equity if the home is sold.

9. Which spouse owes what, and to who

In family court matters, the court will normally divide the property equitably.

Their focus is on which assets are marital assets and which assets are separate individual assets.

An equitable division of assets doesn’t always mean a 50/50 split.

In some cases, your or your spouse may be awarded more than 50% depending on who stayed home to raise the children and who will be raising them after the divorce and many other factors your family lawyer will explain.

The bankruptcy court is concerned with how the assets and debts are titled. If the home is only in your name, then creditors who have a judgment against your spouse can’t go after your home as well to pay his/her debts.

They could, however, go after the home if as part of the family agreement, you transfer your interest in the home to your spouse.

The same idea holds true for your car. If your spouse gets into an accident and they don’t have enough insurance to pay the damages to the person they hurt, the person who was hurt can’t make a claim against you if the car is in your spouse’s name.

They can make a claim against you if the car is in both your names.

If your spouse owes credit card or medical bill debt, the creditor can try to collect from both your assets and income.

If you and your spouse both signed for a loan and then fail to pay the loan, the lender can proceed against both of you.

For these reasons, it is critical that a bankruptcy lawyer understand your full asset and debt situation, and that of your spouse too.

10. Children, divorce, and bankruptcy

If you have children, then both divorce and bankruptcy become much more complicated.

If there are children, decisions need to be made about child support and custody.

A major consideration if you have children is where they will live.

If you had a home, will they continue to stay in the home?

When one parent leaves the home, where will that parent stay and how much will that cost?

If you have a home and are having financial difficulties, then filing a Chapter 13 becomes a high priority because Chapter 13 is the way most families in severe debt save their home.

If you don’t have a home, then it makes more sense to file a Chapter 7 to liquidate your unsecured debt.

If you have children, then both parents need cars to transport their children to the other parent’s home and school, friends, social events, etc.

If you have children, then child support will be required.

Child support is one of the debts that is not dischargeable.

Speak with an attorney first

If you are thinking of getting a divorce but are also having financial difficulties, you should contact a bankruptcy lawyer as soon as possible.

He or she will explain your rights and will help you develop the right financial strategy for your family situation and help you obtain the best outcome.