How to Manage a Divorce and Bankruptcy

bankruptcy and divorce

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If you and your spouse are facing the prospects of a divorce and a bankruptcy, you are not alone. Financial troubles are often cited as the top reason for couples to divorce. Of course, the question now is how best to manage these two legal issues. The first step is to consult an experienced bankruptcy lawyer for advice on how to proceed. For many couples, the best course is to go through a bankruptcy first and then proceed with the divorce.

How Bankruptcy Solves Money Issues

Bankruptcy resolves most money issues. Generally speaking, the debts of most couples are the responsibility of both parties. In a Chapter 7 bankruptcy, most non-secured debt, including credit cards and loans, can be liquidated. In a matter of four to six months, a couple can go from crushing debt to virtually no debt, with the exception of secured loans such as a mortgage.

In addition, a couple’s assets are seized once personal bankruptcy is filed. Usually, there are exemptions for the family home and a vehicle, as well as most of the personal items in the house. It’s even possible that some couples may want to reassess their desire for a divorce once the debt has been removed. If not, starting from zero, so to speak, will make it much easier in the divorce proceeding.

Why Bankruptcy Should Take Place First

Save Money by Filing for Bankruptcy

When a couple must pay legal fees for both a bankruptcy and a divorce, any possibility to save money should be explored. By filing for bankruptcy first, the couple saves the expense of separate bankruptcy filings after the divorce. That’s twice the financial impact in filing costs and attorneys fees. Make sure to take advantage of a consultation with a bankruptcy attorney to ensure there are no unusual financial complications that might make filing for divorce first the smarter option.

Child Support Is Not an Issue

Bankruptcy law does not allow a spouse to liquidate child support and maintenance that’s been ordered as part of a divorce settlement. A spouse should not be concerned about filing for divorce first, only to have an ex-spouse then file for personal bankruptcy. A bankruptcy attorney can confirm that child support is one of the debts that cannot be discharged in Chapter 7. In a Chapter 13 repayment plan, child support must be fully repaid, under federal bankruptcy laws.

When Divorce Should Take Place First

If there are significant property issues, it may be necessary to propose a Chapter 13 repayment plan so that property is not seized. However, because the repayment plans are generally five years long, most couples won’t want to stay together that long to resolve their financial issues. In that situation, a couple may prefer to seek a divorce first, and then individually file for bankruptcy after the divorce.

Bankruptcy Filing Fees

Once you have legally separated or gotten a divorce from your spouse, the option of filing for a joint bankruptcy is no longer available. If you begin with a bankruptcy before the divorce, it’s possible to hire a single lawyer and avoid filing and attorneys fees. For a Chapter 7 bankruptcy, the savings could easily be thousands of dollars. The biggest wrinkle here is the ability of the two soon-to-divorced spouses to remain amicable long enough until a bankruptcy is discharged. However, if one spouse believes the other is responsible for most of the debts it may not be possible to move ahead into bankruptcy as a couple. A free consultation with your local bankruptcy lawyer will lay out the pros and cons of filing for bankruptcy as a couple.

Eliminate Unsecured Debt

If credit cards and other unsecured debt are the main reason you and your spouse are in financial trouble, liquidating as much of that debt in a bankruptcy filing before the divorce can benefit both spouses. The assumption here is that eliminating a significant amount of debt won’t also eliminate much of the tension that has the couple pointed toward a divorce.

Qualifying For Chapter 7

There’s no point trying to file a bankruptcy in advance of a divorce if you and your spouse can’t qualify under the income guidelines for Illinois/Missouri or through the Means Test. Qualified bankruptcy lawyers can explain the way in which the bankruptcy court uses a Means Test to determine if there is enough money available to pay to creditors in a Chapter 13 case. Most couples headed for divorce don’t file for Chapter 13 because the reorganization plan lasts a minimum of least three years (and usually five years). Divorcing in the middle of a bankruptcy raises a host of legal issues that will complicate your situation and almost certainly require that each spouse retain and pay for their own attorney. Your bankruptcy lawyer can determine if you will be able to qualify for a Chapter 7 filing.

Length Of Court Case

If you and your spouse file for divorce before individually moving forward with bankruptcy, it can take some time for property and custody issues to be resolved. Once either or both of you then file for bankruptcy, the federal court immediately has jurisdiction over the estates of both bankruptcy filers. That means a state district court cannot make any decisions in regard to the property involved in the divorce cases until the federal bankruptcy court has finished its review. Most people who file for divorce want the process to move along as quickly as possible. By adding a potentially contentious bankruptcy in the middle of a divorce, a couple all but guarantees plenty of time in both state and federal court.

Non-Dischargeable Debts

It’s important to realize that domestic support obligations are among the categories of debt that cannot be discharged in bankruptcy court. If you and your spouse decide to pursue a divorce first, any payment orders from the judge cannot be wiped out in a subsequent bankruptcy case filed by your former spouse. It’s obvious that child and spousal support payments are domestic support obligations. But even if a judge orders that one spouse pay the legal fees for the other that is almost certainly a domestic support obligation as well. If you have any questions about what debts can be liquidated in a bankruptcy, check with your bankruptcy lawyer.


Important Disclaimer: The information discussed above and throughout this website should not be relied upon to make any decisions without first speaking to a bankruptcy attorney. There are many intricate rules of law governing bankruptcy with many exceptions to the general rules that could change the advice given by an attorney based on the differing facts in each person’s special set of circumstances. THEREFORE, it is important to discuss any information contained in this website with one of our attorneys before taking any action or refraining from taking any action.

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