What You Need to be Aware of Dealing with a Bankruptcy and a Divorce Together
Couples can find themselves facing divorce and bankruptcy at the same time. It’s important to carefully think about which legal process to conduct first. This article looks at how it matters, and how a lawyer can help.
For many couples, financial stress is a leading cause of divorce. Money problems can lead to arguments, even in marriages that have a solid foundation. The stress can be so overwhelming that it forces spouses to part ways. Certainly, when a married couple struggles against impossible levels of debt, filing for bankruptcy may make sense. It’s important to determine what to file first, however – bankruptcy or divorce.
Things to consider
Timing is fundamental when filing for bankruptcy and divorce. When a couple gets divorced first, and then files for bankruptcy, both spouses may end up with inadequate debt relief. An example may help.
A couple, John and Jane, have been married for a decade, and decide to file for divorce after years of unhappiness. Once their divorce is finalized, John is assigned half of the marital debt, which amounts to tens of thousands for personal loans, credit cards, and other joint debt. Once John is free of the marriage, he has no way to handle his debt, other than to file for bankruptcy. The bankruptcy discharge grants him freedom from his unsecured debts, including the credit card bills that came out of the divorce. However, these were marital debts. Jane signed for them, too. This means that if the credit card company can’t get money out of John, they are allowed to turn to Jane. She is now saddled with the entire credit card debt of the couple. Since the creditors weren’t a part of the divorce, they aren’t required to honor the way the court divided up the credit card debt. The only thing Jane could do here would be to file a civil suit against her former husband, to collect.
There is a better option
Rather than file for divorce first, filing for bankruptcy when you are still married is a better idea. When you begin by filing for bankruptcy as a couple, you get relief on your joint debt first. Then, when you file for divorce, you won’t need to worry about one party being unable to repay their debt. Certainly, you can make a mistake in the divorce by proactively accepting the debt and reviving it for no reason. If you have a good lawyer to guide you through the process, however, you should be able to avoid this pitfall.
There is another idea to keep in mind when you have a divorce and a bankruptcy filing to deal with. If either you or your spouse, as part of the marital settlement agreement, were to wholly assume the debt while indemnifying the other party, the debt would turn into a Domestic Support Obligation, which would set limits on the degree of relief that you would get in bankruptcy court, later. You’re only able to discharge your domestic support obligations through a Chapter 13 filing, not a Chapter 7 filing.
There are upsides and downsides to either way of approaching a situation in which a bankruptcy filing, and a divorce filing are involved. If you have already filed for divorce, you need to talk to an experienced bankruptcy lawyer about it as early in the process as possible to make sure that they are able to help you with your financial obligations.
Divorce and bankruptcy are complex legal processes and have a considerable effect on one another. It is important to consult with an experienced attorney for guidance related to one’s individual situation to determine which to file for first and how to navigate these legal waters.