Bankruptcy and Divorce
Filing divorce can have a significant impact on the spouses’ finances especially for dual income households. Many spouses incur substantial legal fees during the divorce process as well. One of the spouses may be required to pay alimony and/or child support. As part of the divorce settlement, one of the spouses may be ordered to pay the other spouse’s legal fees and/or joint debts such as credit cards. For these reasons, it is very common for a divorce to lead to bankruptcy.
Many clients ask whether it is better to file bankruptcy before or after filing for divorce. The answer is, as always, it depends. If you have minimal or no joint unsecured debts, (credit cards), it usually makes sense to file bankruptcy before filing divorce. This is especially true if both spouses plan to file bankruptcy. Filing a joint case will save you time and money in legal fees and court costs. Further, the exemptions (laws that protect your property) are double in a joint case what they are in an individual case.
Even if both spouses plan to file bankruptcy, it might make sense to file the case after the divorce if their combined income disqualifies the spouses from chapter 7. In other cases, one spouse may be a high income earner. The income limitations are much higher for a two person household vs a single person household. This spouse may not qualify for an individual bankruptcy but may qualify for a joint bankruptcy. This is true for single income households and in cases where one of the spouse’s makes considerably more income than the other.
If you have considerable joint debts, you may want to file bankruptcy before filing for divorce. Any joint debts the divorce court orders you to pay cannot be fully discharged in the bankruptcy. The joint debt is treated like alimony by the bankruptcy court meaning the discharge will not apply to that debt. Your obligation to cover your ex-spouse’s liability will not be discharged. If you file bankruptcy first, you might be able to discharge the joint debts and prevent the divorce court from including those debts in a settlement agreement.
It should be noted that any type of family support obligation cannot be discharged in bankruptcy.