For some couples, money is the largest stress factor in their relationship. Debt problems and divorce often go hand-in-hand with one leading to the other. Sometimes resolving the debt can save the relationship and sometimes it cannot. In either case, bankruptcy may be the answer. If you're contemplating filing for bankruptcy and divorce, timing is critical.
Whether you should file for bankruptcy before or after a divorce depends on where you live, how much property and debt you have and what type of bankruptcy you're going to file.
- Income and bankruptcy qualifications: Your income may determine what chapter of bankruptcy you qualify for. A Chapter 7 bankruptcy will allow you to discharge your debts in as little as three to five months. In a Chapter 13 bankruptcy, you'll make payments to your creditors for three to five years. The amount of income you can earn while still qualifying for a Chapter 7 bankruptcy is also based on the size of your household. The more people in your household, the more you can earn while still qualifying.
- Protecting assets: Divorce divides assets between spouses while bankruptcy liquidates or otherwise addresses assets that are not protected by bankruptcy exemptions. If you file for divorce prior to filing for bankruptcy, the divorce court may allocate assets between you. However, if you file for bankruptcy after this, the assets may not be protected from creditors. Filing for bankruptcy prior to divorce may eliminate this problem by utilizing the bankruptcy exemptions allowed to a married couple. Filing for bankruptcy in the middle of a divorce will stop the property from being divided due to the automatic stay. The automatic stay stops actions against your property, protecting it from your creditor's collection efforts. If you choose to file for bankruptcy in the middle of a divorce, your divorce may take longer as the assets will need to be dealt with in the bankruptcy.
- Allocation of debts: Litigating which debts should be assigned to each spouse during a divorce can be a costly, time-consuming process. Additionally, the divorce court can order you to pay the debts of your ex-spouse. The court's order for your spouse to pay a debt does not change who owes the debt to the creditor. If you have a credit card in your name and your ex-spouse fails to make a payment on your credit card, then you will likely face collections, lawsuits and negative credit reporting. If you end up paying the debt, you are entitled to be reimbursed by your ex-spouse because they violated the divorce decree. However, trying to collect debt from your ex-spouse will likely mean spending more time and money to pursue him in court. As a result, it may be in both spouses' best interest to file bankruptcy and wipe out combined debt before a divorce.
Taking the Next Step
If you're thinking about filing for bankruptcy and divorce, the next step is to meet with an attorney to discuss your options. An attorney will help you determine whether you should file for bankruptcy or divorce first, and they will help guide you through the process.