Bankruptcy and divorce are two of life’s least thrilling challenges. Yet, the two are often tragically intertwined, as a divorce can create financial turmoil, and bankruptcy can be a trigger for marital strife. If you’re thinking about bankruptcy, or more importantly, if your spouse is thinking about it, it’s a good idea to look further into the ramifications of your choices, because the way you approach your divorce settlement can have a lot to do with how the bankruptcy affects your divorce, and vice versa.
To help you understand what we mean, this post will examine the pros and cons of bankruptcy and divorce timing, and the differences between Chapter 7 and Chapter 13 Bankruptcy proceedings when a divorce is involved.
When Should You File For Bankruptcy And Divorce?
Pre-Divorce Bankruptcy: First, you’ll need to ask yourself a few simple questions:
- Is your divorce amicable? Are you able to part ways with your former spouse on good terms and are you confident that they are not hiding assets?
- Are you tired of constant calls and letters from debt collectors?
- Are your spouse and you in agreement about filing bankruptcy?
If you answered yes to the above questions, it most likely makes sense for you to file for bankruptcy with your spouse prior to filing for divorce. It will be less expensive that filing for Chapter 7 or Chapter 13 individually, and most likely it will simplify your divorce proceedings and settlement. Additionally, the automatic stay that is provided by Chapter 7 and Chapter 13 will help alleviate some of the stress caused by collection calls and letters as you sort through your finances and dissolve your marriage.
Bankruptcy filing fees are the same for joint and individual filings. Thus, choosing to file jointly for bankruptcy prior to a divorce will save each party significant costs and attorney fees. In fact, joint filing spouses can save roughly 50% by filing together while still married. Another good thing about filing before a divorce is that the bankruptcy case can clear up issues involving debts and assets, which may facilitate an easier divorce proceeding. If both parties have significant debt problems, it is wise to consider filing before the divorce.
Bankruptcy in Mid-Divorce:
It is fairly common for one party to file for bankruptcy during a divorce, which can cause considerable financial issues. Typically, this is a tactic which is taken by one spouse to hurt the other and delay divorce proceedings. While most proceedings will not be stayed by a bankruptcy filing, property divisions are an exception, and the bankruptcy trustee will need to become involved to keep divisions fair. This may lead to higher fees and costs to the divorcing parties and higher scrutiny to property divisions. However, if there are no assets for the bankruptcy estate to administer, a mid-divorce filing may not be as disruptive.
Post-Divorce Bankruptcy: When considering bankruptcy and divorce, it may not make sense for you to file for bankruptcy prior to your divorce. The most obvious example is if your divorce is not amicable or if you suspect that your spouse may be hiding assets. Additionally, bankruptcy will not prevent you from having to pay child support or alimony. Likewise, filing bankruptcy will not affect your property settlement.
When pursued after a divorce, a bankruptcy filing may lead to increased scrutiny of the marital settlement agreement and the division of assets. If the division is not reasonable, then a bankruptcy trustee can bring an avoidance action where debts incurred by one spouse and owing to the other during the bankruptcy proceedings are likely not dischargeable. Furthermore, costs will be higher than if a couple filed for bankruptcy just prior to a divorce.
Chapter 7 vs. Chapter 13 Bankruptcy
The chapter of bankruptcy you file makes a difference if a divorce is in the picture:
- Chapter 7 Bankruptcy is a liquidation bankruptcy designed to get rid of your unsecured debts such as credit card debt and medical bills. In a Chapter 7, you usually receive a discharge after only a few months, so it can usually be completed quickly before a divorce.
- In contrast, a Chapter 13 Bankruptcy lasts three to five years because you have to pay back some or all of your debts through a repayment plan. Chapter 13 will allow you to keep you assets but in doing so you will be responsible for making a series of payments over the next few years. These payments will have to be considered during your divorce and will have to be written into all settlement documents. It is also a complication to hold onto assets that are to be divided up in divorce court. So if you were looking to file a Chapter 13, it may be a better idea to file individually after the divorce because it takes a long time to complete.
Justin Harelik of Bankrate provides one final note on bankruptcy and divorce:
“You need to understand one harsh truth. Your creditors are not part of your decision to get divorced, even though debt might be one of the reasons for your divorce. Through your divorce decree or separation agreement, the debt is divided between you and your spouse, but that does not mean your liability for any portion of the debt is magically lifted. It only means that one spouse has agreed to make payments on his or her part of the debt.”
Get The Legal Help You Need With Bankruptcy
There is a lot more to dealing with bankruptcy and divorce than what we’ve discussed above. Due the complexities of both procedures, it’s a good idea to get some assistance from an experienced attorney. The bankruptcy lawyers at Suburban Legal Group PC are sensitive to the difficult time you may be facing and bankruptcy services to help you through this tough personal time in your life. We can help you determine what your options are and create a road map to help you get out of debt.
You can also download our book on the 12 Things You Should Know Before Filing For Bankruptcy. You’ll learn all the essentials on filing for bankruptcy in Illinois.
DISCLAIMER: All information on this website are provided for informational purposes only and are not intended to be construed as legal advice. Suburban Legal Group PC shall not be liable for any errors or inaccuracies contained herein, or any actions taken in reliance thereon.