Bankruptcy and Divorce

When debt comes in the door, love goes out the window. Many couples fall in love, fall deeply into debt, and then find that the financial stress puts a deep strain on their relationship. When that financial strain becomes too much for their relationship to handle, divorce and bankruptcy sometimes become inevitable.

Some couples find themselves questioning whether it’s best to file for bankruptcy before, during, or after a divorce. All three scenarios have their advantages and their disadvantages.

Filing For Bankruptcy Before Divorce

If both parties want to file for bankruptcy and file together, this option offers them an opportunity to save money by using the same attorney and paying one court filing fee. Even if they chose to file separately, filing for bankruptcy and discharging their debts before divorce can make the divorce proceedings a lot smoother because there will be no debts to divide.

However, it’s not productive if only one spouse wants to file for bankruptcy. When only one spouse files for bankruptcy that spouse could still wind up with some debt after the divorce proceedings. As part of the divorce order, the court could order that both spouses assume responsibility for any remaining debt. In such a scenario, the bankruptcy will not have protected the spouse who filed. Another disadvantage of filing for bankruptcy before the divorce is that doing so makes the divorce proceedings take longer.

Filing For Bankruptcy During Divorce

There are various reasons why one spouse might file for bankruptcy during divorce proceedings. One spouse could do it out of spite, for financial reasons, or to delay the divorce from being finalized. When a spouse file for bankruptcy during a divorce, it creates a complicated situation.

The bankruptcy court grants an automatic stay as soon as a spouse files for bankruptcy. This automatic stay stops creditors from trying to collect on debts owed by that spouse. Additionally, the automatic stay will prevent the divorce court from dividing property until the bankruptcy court has decided which assets cannot be sold to pay off the outstanding debts.

In some cases the bankruptcy trustee may become involved in the divorce proceedings to ensure that the property divisions are fair. This can cause the divorce proceedings to slow down considerably. However, if there are no assets for the bankruptcy trustee to intervene on the behalf of, it could have a minimal effect on the divorce proceedings.

Bankruptcy after Divorce

Sometimes a former spouse will file for bankruptcy after divorce as a tactic for eliminating debts acquired as part of the divorce order, such as child support or alimony. However, there are protective measures in place to protect the other spouse if this happens, and support obligations can usually not be discharged.

Child support and Alimony debts cannot be discharged under Chapter 7 or Chapter 13 bankruptcy filings, unless they have absolutely no ability to pay from income or property, and if the benefit of being discharged would outweigh the potential financial hardship to the former spouse or child. In regard to property settlements, if your spouse filed for Chapter 7 bankruptcy, they are not dis-chargeable. However, if your spouse filed for Chapter 13 bankruptcy, property settlements could be dis-chargeable, unless the money owed is a support obligation.

It’s an unfortunate circumstance that while love and marriage go together, divorce and bankruptcy also tend to go hand in hand. When you’re deciding whether to file for bankruptcy before, during, or after your divorce make sure to take the advantages as well as the disadvantages of each scenario into consideration so that you can make the best decision for your situation.