Can you file bankruptcy during a divorce, or should you file for one before the other? Find out the answer in this guide from Husker Law in Omaha.
Can you file bankruptcy during a divorce, or should you file for one before the other? Find out the answer in this guide from Husker Law in Omaha.Fights over money are the second-leading cause of divorce in America. It is not uncommon for divorcing spouses to be grappling with enormous debt and financial strain at the same time that their marriage is dissolving. This can lead couples to consider filing for bankruptcy along with divorce.
But can you file for divorce and bankruptcy all at once? Is doing so the best idea, even if you can? Here are the facts.
Divorce and Bankruptcy
Technically, you can file for divorce and bankruptcy at the same time. However, in light of how the legal system works, you cannot complete both processes concurrently.
This is because when you file for bankruptcy, an automatic stay order goes into effect. This prevents you from selling, transferring, or otherwise altering the state of your property and assets. That, in turn, allows the court to begin evaluating your financial situation and making decisions about your bankruptcy case.
Since divorce involves dividing up your assets, your divorce proceedings cannot move forward while your assets are frozen and in limbo. Thus, if you file for divorce and bankruptcy at the same time, your divorce proceedings will be put on hold until your bankruptcy case is over.
Which Comes First: Bankruptcy or Divorce?
Legally, couples are free to choose for themselves whether they want to file for bankruptcy or divorce first. Which option is most appropriate and beneficial depends in large part on the couple and their circumstances.
Filing for Bankruptcy First
For couples parting on amicable terms, filing for bankruptcy first can be the smart choice. Filing jointly for bankruptcy while still married:
- Can save you money
- Simplifies divorce proceedings when you get to them
- May offer larger exemptions and broader protections from debt
Under laws about a couple’s bankruptcy filing, married spouses filing together can sometimes claim up to double the exemptions they would be allowed if filing alone. This can enable couples and each individual within the couple to protect more assets in the long run than they could if they divorced first and filed alone. At the same time, couples can share the cost of a bankruptcy attorney which saves money as well.
Liquidating assets during bankruptcy leaves fewer assets to divide up during a divorce. This can speed up and reduce the cost of divorce proceedings.
That said, filing for bankruptcy first may not be the best choice for every couple.
Filing for Divorce First
Filing for divorce first can be the better option if:
- A split is acrimonious and partners cannot trust each other during bankruptcy proceedings
- Debts were racked up through deceit or in bad faith by one partner rather than equally incurred by both
- Either partner intends to file for Chapter 13 bankruptcy instead of Chapter 7
In cases where spouses cannot work together to productively file for bankruptcy, it is best to get a divorce first. Similarly, if one spouse holds assets that are considered separate property under divorce law and the other is primarily responsible for the couple’s debt, it may be in the best interest of the asset-holding spouse to seek divorce first. Doing so may enable them to keep more of their personal assets than if they went through a bankruptcy as a married couple.
Which Type of Bankruptcy You Choose Matters
A couple’s ability to work together on a bankruptcy case is not the only determining factor as to whether they should file for bankruptcy first or divorce first. Which type of bankruptcy an individual or couple is interested in also plays a key role in the decision. This is due to the fact that Chapter 7 bankruptcy and Chapter 13 bankruptcy have very different outcomes.
Chapter 7 and Divorce
When you file for Chapter 7 bankruptcy, the court liquidates all of your non-exempt assets. It uses those funds to pay off as much of your debt as possible and then discharges all remaining eligible debts. This leaves filers with a minimum of both debts and assets.
This can be ideal for couples seeking a simplified divorce and a clean slate. It enables both spouses to leave most or all of their debt behind. There will be little divided in the divorce and, while each spouse may start over with very little, they do so unencumbered.
When filing under Chapter 7, it is almost always best to file bankruptcy before divorcing if possible.
Chapter 13 and Divorce
Chapter 13 bankruptcy is different from Chapter 7 in that filers keep most of their assets. They must prove to the court their monthly income and expenses and then work with a court-appointed trustee to create a five-year repayment plan for their debts.
This is difficult or impossible to do before a planned divorce as filers cannot accurately demonstrate their income or expenses since these will be heavily impacted by the results of the divorce agreement. Repayment plans can also complicate divorce proceedings since assets will be divided by the divorce court. They will not necessarily be divided in ways that align with the repayment plan, making it difficult to evenly allocate debt and assets in the divorce.
As such, if either spouse feels capable of managing a Chapter 13 repayment plan and wants to keep most of their assets, they should file for divorce first and then apply for bankruptcy once that settlement is finalized.
Navigating Complex Divorce Bankruptcy Situations
Divorce can feel overwhelmingly complicated and stressful. So can bankruptcy. The laws around each process are complicated and even small differences in timing, how you complete paperwork, and other basic steps can have an outsized impact on your end results.
The more complex your interpersonal or financial situation, the more difficult it becomes to identify and make the right choices. Consulting an attorney can help. Attorneys familiar with both processes can provide you with invaluable assistance in:
- Asking the right questions
- Determining your priorities
- Avoiding common pitfalls
- Taking the correct steps to achieve your long-term goals
Schedule a Consultation with an Attorney
If you are facing a combination divorce/bankruptcy situation, don’t tackle it alone.
Call Husker Law in Omaha, NE at: (402) 415-2525 today to talk to an attorney about your options and which choices are right for you.
