Two people fighting

Divorce or Bankruptcy – Which Should Come First?

For those considering divorce and bankruptcy, the question is often which should come first? Through careful consideration a party can emerge with a fresh start on both fronts. Here’s how.

Using bankruptcy to eliminate marital debts and protect marital assets.

If the couple can qualify, completing a joint chapter 7 bankruptcy prior to a divorce is perhaps the best option.

A chapter 7 bankruptcy eliminates most of the marital debt; leaving only non-dischargeable debt (taxes and student loans) and marital assets to be divided. This can greatly streamline the divorce process and save the couple substantial attorneys’ fees in their divorce.

When filing jointly, only one petition and filing fee is required. The parties can also double their exemption amounts. This can protect most, if not all, of the marital property from the bankruptcy trustee.

But can you work together for at least four months?

This might be the most important question. A bankruptcy can be filed in the middle of a divorce, but frankly, it’s tough. Both parties must communicate, work together, and stay on the same page for the four months the bankruptcy case remains open.

During this period, the divorce will be on hold. While the divorce court could enter the divorce decree, it loses the ability to divide the marital property until the bankruptcy case is concluded. Usually, the divorce court will simply wait until the bankruptcy case is closed before wrapping everything up in a final decree.

Sometimes it’s best to file for divorce first.

Sometimes only one spouse is interested in filing bankruptcy. Where there is a large amount of marital debt, it may just be best to finish the divorce and then file bankruptcy. At that point the marital debt is divided and the spouse wishing to file will know exactly what debt to include in the bankruptcy.

Waiting also avoids the risk of receiving a discharge only to receive half (or more) of the marital debt from the divorce. This could be a huge blow when a chapter 7 cannot be filed again for another eight years.

Other times, it may be that the combined household income prevents the parties from qualifying for a joint chapter 7 bankruptcy. In that event, it may make sense to complete the divorce (or at least be legally separated) so that only individual income and household expenses are considered.

The alternative would be file a chapter 13 bankruptcy and be stuck together in a payment plan for another three-to-five years. For many individuals considering divorce, this is just not an option.

As everyone’s case is different, the key is to consult with an attorney experienced in both divorce and bankruptcy law. For more information or to discuss your particular circumstances, please feel free to contact me at (317) 830-5993 or via email.