If you are considering bankruptcy during or after a divorce, it is important to understand how the two may interact. Here are 10 key facts about bankruptcy and divorce to help you make the best decision for your financial future.
If you’re going through a divorce and bankruptcy, you may need to consult with both a bankruptcy lawyer and a family lawyer. Divorce and bankruptcy can be emotionally draining experiences.
A divorce means that a married couple has separated and creates feelings of stress and anxiety about the future. A bankruptcy means that an individual is having difficulty making payments on time and may need help in repaying debts.
Understanding Bankruptcy & Debt
Start by learning about the different types of bankruptcy and the types of debt they cover.
Chapter 7 vs. Chapter 13
There are two types of consumer bankruptcies that are most common: Chapter 7 and Chapter 13. Most individuals and married couples file one of these.
Chapter 7 bankruptcy is the most common type of bankruptcy. In Chapter 7, you can get rid of some (or all) of your debt and start fresh, usually within 4-6 months. Chapter 7 bankruptcies are sometimes called liquidation bankruptcies because the trustee administering your case can take and sell any non-exempt property you own.
Although this is not a common occurrence, most people who file for Chapter 7 bankruptcy are able to keep most, if not all, of their personal belongings. If your case is successful, the court will issue a discharge that eliminates most of your debts. There are some types of debt that cannot be discharged through Chapter 7 bankruptcy. We will discuss that in more detail shortly.
Chapter 13 bankruptcy is more complex and it takes longer to file than Chapter 7. With Chapter 13, filers must participate in a 3-5 year repayment plan and have enough disposable income to repay some of their debts. If you make too much to qualify for Chapter 7 or own a home or car, Chapter 13 provides an opportunity to catch up on past-due payments and keep your property.
Types of Debt
How your debts are treated in bankruptcy depends on what kind of bankruptcy you file and:
Whether the debt is secured or unsecured.
The question is whether the debt can be wiped out under the U.S. Bankruptcy Code.
What’s the difference between secured and unsecured debt?
Secured debt is debt that uses property as collateral. The most common types of secured debt are mortgage loans and car loans. Filing for bankruptcy will not protect the collateral.
If you experience financial difficulties and are unable to make your payments, the lender has the legal right to reclaim the collateral. This process is called foreclosure if you’re behind on a mortgage, or repossession if you’re behind on car payments. There are greater options available to restructure secured debt if you file for Chapter 13 bankruptcy as opposed to Chapter 7.
Any debt that is not directly linked to an object or property is unsecured debt. This can include medical bills or credit card statements.
What kinds of debts can’t be discharged?
While not every unsecured debt can be forgiven in bankruptcy, there are still many that are. The Bankruptcy Code lists which debts can and cannot be discharged, so if a debt cannot be forgiven, you will still be responsible for repaying it even after bankruptcy.
State taxes aren’t always priority debts, but they may be if they’re based on federal taxes. Child support and alimony payments are types of debts that can’t be discharged in bankruptcy. Federal income taxes are usually priority debts, meaning they can’t be discharged either, unless they meet a complicated set of criteria. State taxes may also be priority debts if they’re based on federal taxes.
Personal debts that are related to child support or alimony cannot be removed through bankruptcy, regardless of which chapter is filed.
You may be required to pay some of your spouse’s debts as part of your divorce decree. If the wording of the order is such, you could still be held liable for that debt, even if it’s discharged in bankruptcy.
Which Type of Bankruptcy Is Right for You?
We can now discuss how to choose which type of bankruptcy is most suitable for you, given that you are aware of the two most popular types of bankruptcy and the three different types of debt. Some important questions need to be answered first.
Do You Plan To File Bankruptcy With or Without Your Spouse?
You and your spouse will need to decide if you are going to file for bankruptcy together or not. If you are still legally married, you can file for bankruptcy without your spouse or you can wait until after the divorce to file for bankruptcy. Some important considerations will be discussed below.
Are You Eligible for Chapter 7?
If you don’t have enough to repay a portion of your debts, you may be able to file. You may be able to file for Chapter 7 bankruptcy if you pass a means test. If your current monthly household income is less than the median income for your household size in your state, you will qualify. If you do not have enough to repay a portion of your debts, you may still be able to file.
The size of your household plays a big role in the means test. This may affect your decision to file for bankruptcy jointly with your spouse or on your own. You might find that if you file together, your combined income is too high for your household size to qualify for Chapter 7 bankruptcy. However, if you get divorced or separated first, you might both individually qualify for Chapter 7 bankruptcy with your respective household size and incomes.
It is double stressful to contemplate divorce and bankruptcy at the same time. The following are some of the key considerations you need to review with your attorneys when divorce and bankruptcy are both at issue:
1. The timing of the filings
It is usually best to file one action at a time, rather than both.
- Either file the bankruptcy first and wait for a discharge or plan approval – and then file for the divorce, or;
- File the divorce first and then file the bankruptcy when all the divorce matters have been resolved.
Filing for both divorce and bankruptcy at the same time is usually a major financial and emotional risk.
Generally, declaring bankruptcy first is probably the more logical option for several reasons:
- The filing of the bankruptcy acts aa an automatic stay on most collection actions. This gives you the time and energy to think about your financial situation and how it will affect your marriage or divorce.
- Bankruptcy helps to sort out a lot of your financial concerns. It helps by eliminating or reducing your unsecured debt – depending on whether your file a Chapter 7 or a Chapter 13 and depending on other factors.
- The family court itself generally needs the approval of the bankruptcy court to proceed – so it makes sense to let the bankruptcy proceed to a discharge or a plan approval first.
- Filing the bankruptcy first can also help the spouses protect their home which is often the most valuable asset in terms of economic value, and because it provides a place for at least one spouse and for the children to live.
- Filing for the bankruptcy first generally avoids the issue of who will pay for the bankruptcy. If both spouses file together, they normally pay from their joint funds.
2. Why you may want to file for the divorce first
If your income is above the median for your family size and geographical location, you may not be able to file a Chapter 7 bankruptcy and may be forced to file a Chapter 13 bankruptcy instead.
If a couple files for joint bankruptcy, a joint income test is used. If their combined income is too high, it may be better to first handle the divorce issues, and then file separately when the divorce is finalized.
The decision of whether to have children partially depends on whether both spouses are working or just one spouse is working.
3. Is the bankruptcy going to be a Chapter 7?
A Chapter 7 bankruptcy takes normally takes six months from the date of the filing of the petition to the date of discharge.
A Chapter 13 bankruptcy typically lasts for three to five years.
Many couples can wait six months before getting married, but for some couples, waiting 3 to 5 years may be too much.
Chapter 7 bankruptcy is usually filed by people who do not own a home or other property that they want to protect.
This is because the home is usually the biggest asset that is contested in these situations.
People tend to fight more over stocks, cash, and other benefits that can be more easily valued and sold.
4. Is the bankruptcy going to be a Chapter 13 bankruptcy?
A Chapter 13 bankruptcy is when you file a plan with the court to repay your creditors over time, usually three to five years. This is done if you want to keep your house or other secured interests. With secured interests, these are loans that have collateral backing them up. For example, the collateral for a loan to buy a house is your home. The security interest is referred to as a mortgage.
If you do not make your car loan payments on time, the lender may try to take back your car and sell it to pay off the loan.
In a Chapter 13 bankruptcy, you need to:
- Offer to pay all the arrears on any secured loans over a three to five year time span.
- Offer to pay the future mortgage payments or other secured loan payments as they become due.
- Offer to pay a percentage of the unsecured debts such as credit card debt or medical bills over the same three to five year period.
5. Is the divorce going to be a quick and quickly overdone with?
If both spouses agree that the marriage can’t be saved and there are no children or home involved, then the divorce should proceed quickly.
If creditors are threatening to foreclose on a home or there is some other urgency, it may be better to file for divorce first.
If one of the parties wants to contest the divorce, it can take months or even years to resolve.
If you are getting a divorce and there is disagreement about who gets what, filing for bankruptcy first may make more sense.
6. The need to meet with both your bankruptcy and divorce lawyer
Your divorce lawyer will not usually do bankruptcy work, and your bankruptcy lawyer does not usually do divorce work.
Survey respondents who needed legal assistance with both their divorce and bankruptcy reported hiring separate lawyers for each issue.
You should tell both lawyers about each other.
Your divorce lawyer and your bankruptcy lawyer can work together so that you get the best legal advice possible.
This means that it is generally advisable for spouses to use different lawyers so that there is no conflict of interest.
If couples file for bankruptcy together, they will normally only need one lawyer.
If your interests as a couple are in conflict with each other, you may need to each use different bankruptcy lawyers.
Delaying one of these processes is usually advised so you can focus on rebuilding your credit and your life. It is usually not a good idea to go through both a divorce and bankruptcy at the same time because it can be difficult to focus on rebuilding your life and credit simultaneously. It is often advised to delay one of the processes so that you can put all your energy into the other.
If one legal action is completed before another, you may need fewer lawyers.
7. Which family debts are not dischargeable in bankruptcy
There are some debts that cannot be discharged in a Chapter 7 bankruptcy, including some family debts and a few other types of debts.
If you are able to repay any arrears, it will likely be over a three to five year period.
In most cases, future child support and alimony payments must be paid through your family court as they become due. This cannot be changed in most cases, although there are some situations where it can be.
Debts for alimony and child support can’t be removed in bankruptcy, except for in a few special cases.
There are some types of debt that cannot be discharged through bankruptcy, such as student loans, taxes, and fines.
. If you are seeking more information about paying alimony and child support payments after a bankruptcy, please see the attached article.
This means that the debtor will still be responsible for paying any debts that are not discharged after a Chapter 7 bankruptcy, and these debts must be included in any Chapter 13 payment plan.
8. Personal exemptions
You may be able to double your personal exemptions.
If you file your taxes jointly in a state like Connecticut, you can potentially save your home or a lot of money if you sell it. This is because the personal exemption for real estate is much higher than in other states.
9. Which spouse owes what, and to who
In family court matters involving the division of property, the court will usually split the property in a fair and reasonable manner.
The lawyers are focused on which assets are marital assets and which assets are separate individual assets.
An even split does not always mean that the division of assets is fair.
The amount of custody you or your spouse are awarded may be more than 50% depending on who stayed home to raise the children and who will be raising them after the divorce. Many other factors will be explained by your family lawyer.
The bankruptcy court is concerned with who owns the assets and debts. If the home is only in your name, then creditors who have a judgment against your spouse can’t go after your home to pay his/her debts.
If you transfer your interest in the home to your spouse, they could go after the home.
This is because car insurance follows the car, not the driver. If your spouse is in an accident and doesn’t have enough insurance to pay for the damages, the person they hurt can’t make a claim against you. This is because car insurance follows the car, not the driver.
If the car is in both your names, they can make a claim against you.
If your spouse owes any sort of debt, be it from credit cards or medical bills, the creditor can try to take payment from both your assets and your income.
If you and your spouse both signed for a loan and default on the loan, the lender can come after both of you.
It is important for a bankruptcy lawyer to understand your full financial situation, as well as that of your spouse.
10. Children, divorce, and bankruptcy
If you have children, then both divorce and bankruptcy can become more complicated.
If you have children, you will need to make decisions about child support and custody.
One of the main things to think about when you have kids is where they will live.
If you own a home, will they continue to live in the home?
When a parent leaves the home, they will need to find a place to stay. This could cost money for things like rent or a hotel room.
If you are struggling financially and own a home, then filing for Chapter 13 bankruptcy protection should be a high priority. Chapter 13 is often the best way for families in severe debt to keep their home.
If you don’t have a home, Chapter 7 bankruptcy may be a better option to liquidate your unsecured debt.
If you have children, then you will need two cars to ferry them between both parents, as well as to and from school, friends’ houses, and social events.
If you have children, you will be required to pay child support.
This means that if you owe child support, you will still owe this debt after you file for bankruptcy.