Divorce and Bankruptcy
Divorce and Bankruptcy
It has been suggested that many of the people who file for bankruptcy experience job loss or medical hardship during divorce.
One of the leading reasons cited for bankruptcy filing is financial stress due to divorce.
Not really surprising considering that on top of legal expenses associated with divorce, you and your spouse will now need to support the expenses of two separate households instead of just one.
Add to this marital debt, and it can get really stressful.
So for many people, divorce and bankruptcy go hand in hand. If this is the path that you and your soon to be ex are considering, planning ahead can make both your divorce and bankruptcy filing less complicated and more cost effective.
Here are important things to consider before filing for either divorce or bankruptcy:
Timing is important.
It is either one or the other. You cannot let filing for divorce and bankruptcy overlap because it will just result in complications. When your life is already in a precarious balance, you don’t want to intentionally add any more to the stress.
Let us look at some scenarios and possible outcomes:
First, it is important to discuss the Automatic Stay. When you file for bankruptcy, either through Chapter 7 or Chapter 13 (this will be discussed in more detail later), an automatic stay is put into place to make sure no property is transferred or debts collected.
The purpose of this is to enable the bankruptcy court to sort out debts owed and what assets can be used to help pay for some of the debt. This remains in effect throughout the bankruptcy process.
Filing for divorce immediately after filing for bankruptcy. Though this might seem like fast tracking the process, filing for divorce while the bankruptcy process is still ongoing can cause more delays, not to mention, more stress than necessary.
One of the most complex tasks in a divorce is the division of assets. The automatic stay which puts all assets and debts on hold will make it very difficult for the family court to do rue on asset division. The family law attorney must have a good grasp of bankruptcy law in order to protect his or her client during a divorce with a bankruptcy pending.
Filing for bankruptcy during a divorce. Often to save on divorce related expenses, couples opt to hire a divorce attorney jointly. Here in itself is a conflict of interest already. However, when you or your spouse decide to file for bankruptcy during a divorce, this arrangement will definitely not work anymore.
It is unethical for attorneys to represent clients that have a conflict of interest with each other. Because of this, one or both of you will need to hire a new attorney. Not only is the time and effort to do so an added strain, this is likewise a financial burden given the fact the you and your soon to be ex spouse will now be paying separate legal fees.
Bankruptcy before divorce. Most couples file for bankruptcy before going through divorce proceedings. Bankruptcy fees are the same for joint and individual filing. So filing jointly with your spouse before a divorce can save you a lot in court and lawyer’s (should you opt to hire a bankruptcy attorney) fees.
This is also a logical option if the majority of debt obligations are owned jointly. Filing for bankruptcy before divorce can simplify issues regarding debt and property division and lower divorce costs as a result. This is because assets are typically already divided during the bankruptcy process.
Aside from simplifying debt division, a joint bankruptcy filing can protect you from paying joint debt. Consider this scenario: Should your spouse file for bankruptcy on his own, he may be exempted from paying off his debts, but since you yourself did not file a bankruptcy, you are still responsible for joint debts. And you are left holding the short end of the stick, and the responsibility for the debt.
Filing for joint bankruptcy may also allow you to have double exemptions on your assets. Certain states allow you enough exemptions so you are able to protect all property you own between you and your spouse.
Chapter 7 vs Chapter 13
Chapter 7 and Chapter 13 are the two types of bankruptcy available for consumers.
Chapter 7 is a liquidation bankruptcy and is designed to get rid of unsecured debts such as credit card debt and medical bills. This eliminates debts quickly - typically within three to six months. This allows you to file divorce sooner. It is therefore the option to take if you choose to file bankruptcy first before filing for divorce.
Be aware, however, that if you intend to file a Chapter 7, the decision to file before or after a divorce hinges on income if you maintain a single household. If you plan to file a joint bankruptcy, you are required to include your combined income. If your joint income is too high, it will not allow you to qualify for a Chapter 7.
Chapter 13, in contrast, lasts much longer because it sets up a repayment plan to pay off some or all of your debts. This typically lasts three to five years. If you are considering this option, you and your spouse may be better off filing for bankruptcy individually after divorce.
Bankruptcy Does Not Eliminate All Debts
If you choose Chapter 7 to eliminate all dischargeable debts, keep in mind that not all debts can be eliminated and you are still responsible for paying them. This includes support payments, as well as mortgage/rent and regular bills.
The following debts are not dischargeable in bankruptcy, meaning that filing bankruptcy will not likely relieve you of your responsibility to pay:
most tax debt
some criminal fines and penalties
Fines owed to government agencies
Chance for a Fresh Start
The dissolution of a marriage is always difficult and stressful, regardless of reasons. When divorce also causes so much financial distress that filing for a bankruptcy is necessary, it becomes even more difficult and stressful.
However, on the flip side, these are also opportunities for a reboot, so to speak. By understanding the intricacies and implications of divorce and bankruptcy and planning judiciously, you, your ex, and your family can begin anew and rebuild your lives successfully.
Hiring a Certified Divorce Financial Analyst during this difficult period in your life can make a difference between just surviving and successfully transitioning to a thriving future. As an experienced Financial Planner, I make the process easier and help both you and your attorney review your options so you understand the impact of your financial decisions and how they will affect your future.
If you need financial guidance as you go through your divorce or bankruptcy or both, please don’t hesitate to reach out to me. As your CDFA, your financial security and life’s goals are my top priority! Let me help you make the next chapter of your life an incredible journey!
Tags: Divorce, Bankruptcy, stressful divorce, bankruptcy considerations, Chapter 7, Chapter 13, asset division, debt exemptions, CFDA, divorce help, divorce financial planning, divorce and finances, divorce financial advice