Financial issues are one of the most common factors that can lead to divorce. In some cases, couples may encounter disagreements about how to handle money, or the stress of dealing with debts and expenses may be one of the reasons for the breakdown of a couple’s relationship. Even if financial problems are not the cause of a divorce, a couple may need to determine how to handle debts as they proceed with the process of ending their marriage. For couples or individual spouses who are considering bankruptcy, it is important to understand the role that this may play in the divorce process and how the end of their marriage will affect their ability to eliminate their debts.

Filing for Bankruptcy Before or After Divorce

Determining the right time to file for bankruptcy can sometimes be difficult. In some cases, a couple may want to deal with their debts and ensure that they will both be in a stable financial position as they move on following the end of their marriage. However, they will also want to make sure filing for bankruptcy will not affect their ability to complete their divorce (and vice versa). Understanding the correct timing of bankruptcy and divorce proceedings can help a couple ensure that they will be able to receive relief from their debts and terminate their marriage successfully.

In cases involving Chapter 7 bankruptcy, a couple may be able to complete this process prior to filing for divorce. A Chapter 7 case (also known as a “liquidation bankruptcy”) will allow certain types of debts to be discharged, and debtors may be required to turn over certain non-exempt assets that will be liquidated so that a portion of their debts may be repaid. This process will typically take no more than a few months, and it may allow a couple to eliminate their joint debts before they move forward with the divorce process. However, debtors must pass a means test before they can qualify for Chapter 7 bankruptcy, and if a couple’s combined income and assets exceed a certain amount, they may not be able to file for this type of bankruptcy together. In these cases, one or both parties may be able to qualify for Chapter 7 separately based on the resources available to them after their divorce.

For those who are looking to obtain relief from their debts, bankruptcy is often the best solution. In a consumer bankruptcy, a person or married couple will generally have two options: Chapter 7 or Chapter 13. While Chapter 7 may be the preferred choice in certain situations, since it will allow for unsecured debts to be eliminated, some debtors may not qualify for this type of bankruptcy, or they may wish to avoid the loss of certain types of property. If a person will be filing for Chapter 13 bankruptcy, they will need to understand how their income and expenses will affect their case.

Creating a Chapter 13 Repayment Plan

In a Chapter 13 bankruptcy, a debtor will propose a plan in which they will make payments to the trustee in their case, and the trustee will apply the amounts paid toward the debts that are owed. The debtor will not be required to turn over any of the assets they own, and if they continue making payments toward secured debts such as a home mortgage, they will be able to avoid the foreclosure of their home or the repossession of other property. If the debtor’s income is below the median income in their state, their repayment plan will last for three years; otherwise, the plan will last for five years.

A debtor will be required to pay all of their disposable income toward their Chapter 13 repayment plan. Disposable income is calculated by taking the income a person earns and subtracting applicable expenses. Income includes a person’s wages and any bonuses, tips, or commissions they earn, as well as interest, dividends, or royalties they earn; income from a business or rental property; payments received through a pension plan or retirement account; spousal maintenance/alimony payments; and unemployment benefits. However, income does not include child support payments, Social Security benefits, or payments received from the federal government related to the COVID-19 pandemic.

In consumer bankruptcy cases, debtors generally will choose from one of two options. A Chapter 7 bankruptcy will allow a person’s debts to be discharged (eliminated), but they may be required to turn over certain assets, and if they have any secured debts (such as a home mortgage or auto loan), the collateral used to secure these debts may be repossessed. For those who do not qualify for Chapter 7 or who wish to avoid the loss of certain assets, Chapter 13 bankruptcy may be the preferred option. In these cases, certain debts will be consolidated into a repayment plan, and the debtor will be required to make monthly payments toward this plan for three or five years. Unsecured debts included in the repayment plan will be discharged once all payments have been made. A multi-year repayment plan can be a significant commitment, and circumstances may arise that may affect a debtor’s ability to complete their plan. In these cases, debtors will want to determine their options, which may include converting their case into a Chapter 7 bankruptcy and receiving a discharge of their debts.

Reasons to Convert a Bankruptcy From Chapter 13 to Chapter 7

Once a Chapter 13 repayment plan has been confirmed in bankruptcy court, a debtor will be required to make all payments in the plan. If a debtor fails to make any payments, this may result in a dismissal of their bankruptcy case. Following a dismissal, the debtor will owe the full amount of their debts, and creditors may begin taking action to collect what is owed.

If a debtor encounters financial problems that could potentially result in the dismissal of their bankruptcy case, they will want to address these issues promptly. If a person loses their job and cannot earn enough income to make ongoing payments on their Chapter 13 repayment plan, they may seek to convert their bankruptcy to Chapter 7 and receive a discharge of their debts. A debtor may also decide to pursue a conversion if the reasons they chose Chapter 13 no longer apply. For example, if a person was looking to avoid the loss of their home, but their lender has foreclosed on the property because the debtor was unable to make mortgage payments, converting to a Chapter 7 bankruptcy may allow the debtor to eliminate their debts and receive a fresh start.

If you have significant debts, you may be considering your options for receiving debt relief through bankruptcy. However, you may also be concerned that if you file for bankruptcy, you may be forced to surrender certain property that you own. By understanding the effects of different types of bankruptcy and how bankruptcy laws apply to the property you own, you can make the best decisions that will allow you to regain financial security.

Property Ownership in Chapter 7 Bankruptcy

In many cases, debtors will choose to pursue a Chapter 7 bankruptcy, since this will allow them to eliminate all of their unsecured debts. However, this type of bankruptcy may require a person to turn over certain items they own so that this property can be liquidated and some of the debts they owe can be repaid. Fortunately, some exemptions apply to the property that can be liquidated. Federal bankruptcy laws recognize the following exemptions in cases filed before April 1, 2022:

• Homestead - A person may exempt up to $25,150 of the equity they own in their home.
• Motor vehicle - A vehicle may be exempt if it is worth $4,000 or less.
• Personal property - Multiple types of household goods may be exempt, including furniture, clothing, appliances, books, pets, and musical instruments. Individual items may be exempted if they are valued at $625 or less, and the total value of exempt property may be up to $13,400.
• Tools of the trade - Professional tools, books, or other equipment used as part of a person’s profession that are worth a total of up to $2,525 may be exempted.
• Jewelry - Up to $1,700 worth of jewelry may be exempt.
• “Wild card” - Other property that does not fall into one of the above categories may be exempted, up to a total of $1,325. A debtor can also put up to $12,575 of an unused homestead exemption toward other types of property.
• Life insurance - Up to $13,400 of an unmatured policy may be exempted.
• Personal injury judgments or settlements - Damages awarded for loss of income in a personal injury lawsuit or compensation paid to a family member for a person’s wrongful death can generally be exempted. Non-economic damages, other than pain and suffering, of up to $25,150 are exempt.
• Benefits and support payments - Social Security benefits, veterans’ benefits, unemployment benefits, disability benefits, and spousal support payments are exempt.
• Retirement funds - In most cases, the full amount that is saved in a retirement account will be exempt.

In addition to the federal exemptions, each state’s laws define exemptions that apply to residents who file for bankruptcy. In many cases, state laws allow for additional exemptions above those that are provided in federal law. Some states allow debtors to choose either the state or federal exemptions.

People who have experienced financial difficulties that have caused them to be unable to pay their debts may be concerned about the steps that creditors may take to collect what is owed. Creditors or collection agencies may contact a debtor and ask them to make payments, and some creditors may act in a harassing manner, including making threats or contacting a person’s employer. In some cases, a creditor may initiate a lawsuit attempting to collect what is owed, or they may repossess property or begin foreclosure proceedings on a debtor’s home. For debtors who are considering bankruptcy, it is important to understand the protections they can receive, including the automatic stay that will go into effect during the bankruptcy process.

What Is the Automatic Stay?

In legal terms, a “stay” is an order by a court that requires parties to temporarily stop certain actions. When a debtor files a bankruptcy petition, an automatic stay will be put in place while the case is ongoing. This stay will require creditors to cease all collection actions, including:

• Creditor harassment - Creditors will be prohibited from contacting a debtor and asking them to pay what is owed. They cannot call a person at home or at work, send them notices in the mail, or use any other methods to attempt to recover debts.

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