When a couple of divorces, there is much more at stake than their emotional well-being. They must disentangle their finances, establish separate households, and provide for their children’s support and well-being.
Unfortunately, the costs associated with getting divorced are one of the most common reasons people file bankruptcy, the others being job loss and medical bills. This article, from the office of a prominent Philadelphia bankruptcy attorney, will explain how bankruptcy and divorce intersect financially and legally and help you decide whether bankruptcy or another debt relief option is right for you both.
1) Should you file before or after divorce? How to determine which to file first.
This is the first question many divorcing couples ask, and the answer depends upon what joint assets and debts you have and what assets you intend to retain after the divorce. For most couples, this question is answered by whether or not you own a home, have equity in it, and one of you intends to keep it. In this case, and in most cases, it is advisable to file bankruptcy jointly before divorcing. In the alternative, a couple planning to divorce might consider exploring other debt-relief options.
If you decide that bankruptcy is your best option, you should know that only married couples can file jointly, so if it is possible to collaborate on a joint filing at this stage of your relationship, it may be prudent for you to do so. All individual and joint non-priority debt will be discharged, and in some cases income tax debt can be discharged, leaving you both with a clean slate moving forward, ideally.
If when your two incomes are combined you earn too much to file Chapter 7 jointly, then you might consider filing two separate Chapter 7 cases. This will entail twice the legal and court filing fees, but the alternative is filing a Chapter 13 case, which will tie you up for three or five years.
Filing Chapter 13 Bankruptcy and Divorce
Filing Chapter 13 is an option, but most divorcing couples would prefer to move on rather than deal with each other for an additional three or five years. That being said, it may be financially prudent for you to file a joint Chapter 13 case if:
- The marital home is worth less than the balance owed on the first mortgage, and you have a second mortgage or a HELOC. The second mortgage or HELOC can be “stripped off” as unsecured and discharged.
- You own one or more cars that are worth less than the car loan balance and can “cram down” the car loan to the current value and pay it off at prime plus 1-3% in your joint Chapter 13 case, the remaining balance of the loan is discharged as unsecured, and you own the car when you complete your plan.
- You need to catch up on mortgage or car loan payments, or you are being threatened with foreclosure or repossession.
2) Should we file bankruptcy jointly or separately?
The answer to this question depends mostly upon the nature of your relationship. For most divorcing couples, it is best to file jointly if at all possible, however, not every couple going through a divorce has the ability to collaborate on a joint filing.
Filing bankruptcy jointly means multiplying your exemptions by two, increasing the amount of jointly-owned property you can prevent from being seized and sold by the Trustee. If you own a home and one of you intends to retain it after the divorce, you can apply for the homestead exemption and the wildcard exemption to exempt all equity from your bankruptcy estate, placing your home out of the reach of the Trustee who otherwise would seize and sell the property for the benefit of your creditors.
If one of you files bankruptcy prior to divorcing and the other does not, the non-filer will be responsible for all joint debt that is discharged as far as their creditors are concerned. However, the non-filers divorce attorney can negotiate for or argue for partial or equal repayment of those debts in the property settlement agreement. Ultimately, the family law judge will decide how assets and responsibility for debts are assigned..
3) Understanding the division of assets in a divorce and how that affects your bankruptcy.
If you file bankruptcy after your divorce, the division of assets in your property settlement agreement will dictate what assets you must exempt from your bankruptcy estate. All of your assets provided for in the property settlement agreement must be disclosed in your bankruptcy filing. Again, consider how much equity you have in the marital home and whether you are able to exempt it prior to filing bankruptcy.
Any support payments received must be disclosed as income, and any support payments made must be disclosed as an expense.
4) Does bankruptcy stop divorce proceedings?
Yes. Filing bankruptcy after you’ve filed a divorce complaint and before the final judgment of divorce is entered will put divorce proceedings on pause for the duration of your bankruptcy case. It will also pause any other legal proceedings, including collection and foreclosure actions.
For this reason, it is generally not advisable to file bankruptcy while your divorce is pending. Filing before or after your divorce will result in a cleaner, less complicated proceedings.
5) Who is responsible for the debt in a divorce?
The answer to this question will depend upon where you live. If you live in a community property state, you are both responsible for debt incurred during the marriage. If you do not live in a community property state, responsibility for debt will be dictated by the contracts you have with your creditors and whether your family law judge orders either of you to help pay any debt that is not joint. This is often done in lieu of support payments or when it is only fair that both parties be responsible for the debt, such as when a couple of divorces, one party stays in the home with the children, and both parties pay the mortgage.
6) Are divorce-related obligations dischargeable in bankruptcy?
Any debt that is in the “nature of support” is not dischargeable in bankruptcy. Bankruptcy courts have found that payments ordered in the nature of support will include obligations that are intended to be a substitute for support payments, such as mortgage payments or payments of other debt.
General unsecured debt that either party incurred as a result of divorcing, such as attorney fees, may be discharged in bankruptcy.
7) Does bankruptcy help with child support issues?
Yes. First, know that as a matter of public policy, neither child support nor spousal support or alimony are dischargeable in bankruptcy. However, by filing Chapter 13, a support obligor can cure past-due support obligations through their plan and pay them over three or five years. Also, having other unsecured debt discharged in bankruptcy may make support payments more affordable for the support obligor.
Bankruptcy is but one of the many debt relief options a divorcing couple should consider when their financial situation is untenable. Do your research, and if at all possible, discuss your financial goals with each other. The more you can collaborate and agree on how to handle your financial situation, the better off you both will be following your divorce.
About the Author
Veronica Baxter is a legal assistant and blogger living and working in the great city of Philadelphia. She frequently works with David Offen, Esq., a busy Philadelphia bankruptcy lawyer.