Bankruptcy and Divorce
Divorce can be difficult in itself, but adding the stress of debt and bankruptcy can make it unbearable. It isn’t uncommon for one or both spouses to declare bankruptcy before or after a divorce. Debts and assets are divided and sometimes it can be too much for one partner or both to handle.
One thing to remember about divorce and assigning debt is that it’s a court-ordered judgment. When you file for divorce or enter into a separation agreement, stipulation or settlement of divorce, and one party agrees to pay off the marital debts, it is not likely to be removed by bankruptcy, at least in chapter 7. Chapter 13 can still provide a way to discharge these obligations. Creditors have no interest in how or who pays the debts, so even in bankruptcy they can go after the other spouse if the debt is co-signed to that person also.
The spouse can then cite that court order stating that you agree to pay those bills and voila, your chances of eliminating it through bankruptcy gets slimmer. However, this is not true if the bankruptcy is filed prior to the divorce, separation agreement, stipulation or settlement of divorce.
What should come first: Divorce or Bankruptcy?
One of the biggest fears a spouse has after bankruptcy is that the actions of their former spouse could still impact them negatively. Divorce is supposed to be a fresh start for everyone involved, but debt can drag a person down quickly. If the couple plans on filing for both divorce and bankruptcy, you need to discuss it with a bankruptcy and divorce attorney prior to filing for either one.
Your lawyer will be able to tell you the best options for you which are better to file first. The biggest benefit of filing for bankruptcy as a couple prior to filing for divorce is that it can make things easier in the future. If both parties are saddled with debt, a divorce can make things more difficult because of the division of assets and debts. A long line of debt may be a major point of contention and keep the divorce from being amicable. However, there are often conflicts of interest that arise in these situations, and each spouse may need to retain their own bankruptcy attorney.
You will also have to consider what type of bankruptcy you plan on filing. Chapter 7 is a liquidation of assets and discharge of debt. It’s a relatively painless process depending on how much property you have and a judgment is handed down fairly quickly, but as mentioned may not discharge certain divorce-related debts.
A Chapter 13 bankruptcy is a court-ordered repayment plan that can take anywhere between 3-5 years to complete. It also permits you to discharge certain divorce-ordered debts (but not alimony, maintenance or support).
Bankruptcy combined with divorce can be stressful and seem overwhelming, but it is a legitimate form of debt relief which offers a fresh start. Choose the right bankruptcy law firm to help you navigate these turbulent waters.