1. Don’t file for divorce and bankruptcy at the same time

For the sake of simplicity, the two legal matters shouldn’t overlap with each other. Commonly, people choose to file bankruptcy before going through with a divorce – and there are several logical reasons for that. Once bankruptcy is filed, for both chapter 7 and chapter 13, an “automatic stay” is put into place. The automatic stay halts creditors from contacting you and puts a freeze on your assets and property – this is so the bankruptcy court can begin sorting out what debts you owe and what assets you have that can help compensate for some of it. This hold is effective throughout the bankruptcy process.

Now let’s say, you filed for bankruptcy and then immediately filed for divorce, causing the two to overlap. Since a large part of the divorce process is splitting up assets (among other more complex tasks), the automatic stay would make it virtually impossible for the family court to access and divide the assets, since they are put into a hold. Because of this, the divorce could be dragged out longer than necessary and become more emotionally stressful for you or your loved ones.

2. Which one you should file first depends on your situation

Although you shouldn’t file for divorce and bankruptcy at the same time, you can still choose which process to take care of first. While it is ultimately up to you, there are a few things to consider before determining which to file first. If you and your spouse are on amicable terms, it may be best to first file bankruptcy. Filing bankruptcy first allows you both to share the cost of attorney and filing fees and could possibly protect you from paying joint debt – which could be beneficial if you and your spouse own property together.

Some jurisdictions also allow double exemptions on assets if you file joint bankruptcy; for instance, if your home is exempt up to $50,000 with a single bankruptcy, some jurisdictions could allow a double exemption, allowing the home to be exempt up to $100,000. Since exemption laws vary from district to district, it’s always beneficial to consult a bankruptcy attorney in your area to see what options are available for you. Filing for bankruptcy first also simplifies the division of assets in divorce because they are typically divided during the bankruptcy process – although they can sometimes change.

If you and your spouse choose to file for chapter 7 bankruptcy, your joint income might put you over the income threshold for filing. If your individual incomes are below the threshold, you may want to explore the options of filing for divorce before bankruptcy.

3. Chapter 7 is ideal for a quick divorce

One of the benefits of chapter 7 bankruptcy is the timeline of the process. Chapter 7 eliminates all dischargeable debt typically within three to six months, allowing you to file your divorce sooner if you choose to file bankruptcy first. In comparison, chapter 13 bankruptcy sets up a three- to five-year payment plan instead of completely eliminating debt, and can possibly drag your divorce or separation out longer than necessary.

If you are involved in a chapter 13 bankruptcy and decide to file for divorce during the repayment period, you can choose to cancel or restructure the bankruptcy plan. By canceling, you agree to stop the agreed upon payment plan; however, all debt you and your spouse have assumed will still be your responsibility. If you choose to restructure the plan, it divides the plan into two cases – one for you and one for your spouse; you can then handle the bankruptcy separately from your partner. These cases can become complex if not handled properly and can cause a lengthy divorce if anything goes awry. It’s always best to speak with a bankruptcy attorney to see the best course of action for your situation.

4. Not all debts are included in bankruptcy

If you choose the route of eliminating all debt (chapter 7), it’s important to remember that not all debts can be eliminated or discharged. Debts that are deemed “nondischargeable” cannot be forgiven in the bankruptcy process, and you are still responsible for paying them back. The most common types of nondischargeable debts include:

• Alimony
• Child support
• Fines owed to government agencies
• Student loans
• Court fines and/or penalties
• Attorney fees for child custody or support cases

In addition to the debts that are outright nondischargeable, there are other ways certain debts can be barred from discharge. In a chapter 7 bankruptcy, dischargeable debts are considered a “privilege” more than a right, and debtors must abide by the rules listed in the Bankruptcy Code for the bankruptcy court to approve a debt discharge. If the debtor fails to follow these rules, the court may deny their debt discharge request. The chapter 7 discharge may be denied if the debtor:

• Fails to provide requested tax documents
• Hides property for the purpose of defrauding creditors
• Destroys financial books or records
• Commits perjury in connection to the bankruptcy case
• Violates a court order
• Fails to complete a mandatory credit counseling course

There are numerous rules and regulations regarding nondischargeable debts; the best way to determine which debts you can expect to have discharged is to meet with an experienced bankruptcy attorney to review your case.

5. If you file bankruptcy during a divorce, you may need to hire a new attorney

If you and your spouse hired a divorce attorney together, you may need to begin searching for a new one. If you, or your spouse, decide to file for bankruptcy during your divorce proceedings, your divorce attorney cannot represent both of you. This is due to the fact that attorneys are barred from representing clients that have a conflict of interest with each other. Filing for bankruptcy creates a conflict for the attorney because his or her clients are now opponents in another legal matter.

This can become a burden because of the time and effort it takes for one or both parties to find a new attorney and update them on the case so far. It also means that you and your spouse will be paying separate legal fees, creating a financial burden as well.

Divorce and bankruptcy are chances for a fresh start for you, your ex, and your families. By knowing these aspects of the two, you can make a more informed decision and come out stronger than ever. However, both of these processes can be extremely detailed and complex, and should not be handled without experienced divorce and bankruptcy lawyers on your side. It’s always best to consult with Firebaugh & Andrews so you make the right choice. 734-722-2999

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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 you a lot on court fees.  Also, if you decide to hire a bankruptcy attorney, your attorney fees will likely be much lower for a joint bankruptcy than if each of you filed separately. However, you should let your bankruptcy attorney know about your upcoming divorce as there may be a conflict of interest for him or her to represent you both.

Filing for bankruptcy before a divorce will simplify the issues regarding debt and property division and lower your divorce costs as a result.

Chapter 7 vs. Chapter 13 Bankruptcy

A Chapter 7 is a liquidation bankruptcy designed 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.

Property Division

Wiping out your debts jointly through a bankruptcy will simplify the property division process in a divorce.  However, before filing a joint bankruptcy you must make sure that your state allows you enough exemptions to protect all property you own between you and your spouse.  Certain 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 double your exemptions. 

If you can’t double your exemptions and you have more property than you can exempt in a joint bankruptcy, it may be more advantageous 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 the property division process until the bankruptcy is completed.

Allocation of Debts

Litigating which debts should be assigned to each spouse in a divorce can be a costly and time consuming process.  Further, ordering one spouse to pay a certain 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 you had together.  If he doesn’t pay it or files bankruptcy then you are still on the hook for the debt and the creditor can come after you to collect it.  If you end up paying the debt, you have a right to be reimbursed by your ex-husband because he violated the divorce decree. This holds true even if he filed bankruptcy because he can discharge his obligation to pay the creditor but he cannot discharge his obligations to you under the divorce decree.

However, trying to collect from your ex will usually mean spending more money to pursue him in court.  As a result, it may be 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 may not be able to 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.

Call Firebaugh & Andrews at 734-722-2999 for your free consultation.

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