Reasons to File for Bankruptcy in a Divorce

The decision to file for bankruptcy is always strategic. There are reasons to file immediately, and there are reasons to delay a bankruptcy filing. Each case is completely different. Filing for bankruptcy during a divorce is difficult. Divorce actions are in state court and bankruptcy cases are filed in the U.S. Bankruptcy Courts (a division of the Federal District Court), so you have two different courts with competing interests.

Since bankruptcy takes precedence over a divorce when it comes to the parties' income, expenses assets, and debts, you can immediately tell issues are going to arise. So, if a bankruptcy is filed by one of the parties during a divorce, the distribution of assets in the state court divorce case will be delayed until your bankruptcy case is completed. bankruptcy can be a wise way to eliminate debt prior to ending a marriage.

Getting Rid of Debt Before Divorce

Many couples find that fighting over debt is one of the hardest hurdles to overcome while going through a divorce. Successfully filing for Chapter 7 can wipe out the car, mortgage, and other high payments that neither you nor your spouse wants the burden of paying alone. This strategy works very well if both of you are on good terms and can agree to go through bankruptcy proceedings together.

Chapter 7 takes approximately 4 to 5 months to complete, but the real work is done before filing. So, the parties need to know what they want to do with the assets and the debts prior to filing the bankruptcy. After the bankruptcy discharge, they can move forward debt-free with the divorce and eliminate many of the issues which normally bog down a divorce proceeding. Of course, this may mean that there are no assets left to divide when your divorce does begin, but it also means that all dischargeable debts will be wiped clean.

Chapter 13 does not work the same way and both of you may be on the hook for paying back that debt, so make sure to consult with a knowledgeable attorney prior to filing for Chapter 13.

Eliminating Debt After a Divorce

Even though bankruptcy is a great tool for eliminating debt before a divorce, you won’t be able to file if both you and your spouse make a large amount of money and can successfully pay all or a portion of your debts. If you happen to make a lot less than your spouse but are still on the hook for the debt, you may be able to file for Chapter 7 as an individual and remove your name from any joint debts or obligations (you should consult an experienced bankruptcy attorney before doing this).

While bankruptcy can be a useful tool when dividing up debt prior to divorce or removing your name from any debt, there are some types of debt that are not eliminated through bankruptcy.

Types of Debt You’ll Still be Stuck With

Bankruptcy doesn’t get discharge all debts, unfortunately! Here are some kinds of debt that will not disappear after you file:

  • Student loans
  • Alimony
  • Child support
  • Court fees
  • Criminal Penalties

You should also note that attempting to hide any documents (tax papers, books, etc.) from the court might result in those debts being barred from discharge (that’s right, a court can decide not to eliminate a massive debt that you try to hide so be completely open and honest!). If the debt that you and your spouse share fall under one of the categories above, neither of you will be able to discharge that debt through bankruptcy.

Did you know that you can’t use the same lawyer for both bankruptcy and divorce? This is considered a conflict of interest, which means you’ll have to hire two lawyers. So when is bankruptcy a good option before filing for divorce? Typically if both of you have a lower income, neither can pay a debt alone, and both are willing to go through bankruptcy proceedings amicably.

Then again, there are always exceptions to any rule. To find out if bankruptcy in the face of divorce is something that you should consider, contact us today for a free consultation.