How Do Bankruptcy and Divorce Affect Each Other?

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 do not qualify for Chapter 7, Chapter 13 bankruptcy may be an option. This type of bankruptcy will require debtors to create a repayment plan in which they will make payments toward certain debts over a period of three to five years. If a Chapter 13 repayment plan is created prior to when a couple files for divorce, they may be unable to complete their divorce until they have completed their repayment plan, or the choice to go ahead with divorce may lead to the dismissal of their bankruptcy case. If a debtor plans to file for Chapter 13 bankruptcy, it is often best to wait to do so until after completing the divorce process. However, in some situations, a person with an ongoing Chapter 13 repayment plan may be able to convert their case to a Chapter 7 bankruptcy after filing for divorce.

Contact a U.S. Bankruptcy and Divorce Attorney

Filing for bankruptcy can be a complex process, and pursuing a divorce in the midst of this process can make things even more complicated. Those who are in this situation will want to consult with an attorney to determine how they can protect their rights and financial interests. A United States bankruptcy lawyer can advise a person on the appropriate timing of bankruptcy and the steps they can take to ensure that they will be able to receive relief from their debts as they work to dissolve their marriage. 

Sources:

https://www.experian.com/blogs/ask-experian/how-to-handle-bankruptcy-and-divorce-at-the-same-time/

https://www.myhorizontoday.com/bankruptcy101/should-i-file-bankruptcy-before-or-after-my-divorce/