Bankruptcy and divorce can go hand in hand. Stress related to mounting debt creates tension among the married couple, which in turn can put a strain on the relationship. Next thing you know, divorce is a real possibility. So it’s not uncommon to consider filing for bankruptcy during a divorce. However, entering into a bankruptcy proceeding while at the same time divorcing can create additional issues you need to be aware of. The specifics depend upon whether you’re considering a Chapter 7 or Chapter 13 bankruptcy.
Chapter 7 and Divorce
Chapter 7 bankruptcy is for those with an income that is below the median income for the size of their family in their state. The debtor’s assets are liquidated and used to pay back creditors. After non-exempt liquid assets have been distributed, the remaining debt is discharged, and the debtor keeps the exempt assets.
Initiating Chapter 7 proceedings is generally not a good idea while a divorce is pending. The reasons for this are that the bankruptcy places an automatic stay in place, which essentially freezes assets. This means that it’s not really possible for a family court to divide the couple’s assets.
Which is First – Bankruptcy or Divorce?
However, with respect to Chapter 7 proceedings, the good news is that they move fast. Typically, dischargeable debt is eliminated in three to six months. Given this expedited timeframe, parties interested in bankruptcy and divorce should make a decision to choose one or the other to complete first.
If the couple contemplating divorce can continue to work together amicably, then filing for bankruptcy first may make sense. The benefits of doing this first include the lower combined cost of the bankruptcy process and discharge of qualifying debt.
In any case, if a married couple is considering bankruptcy and divorce, the best course of action is to seek legal advice for their specific facts and circumstances.
Chapter 13 and Divorce
This type of bankruptcy is also called a wage earner’s plan. Those with a regular income propose a plan to repay some or all of their debts. The proposed repayment plan calls for installment payments to creditors over a period of three to five years.
Chapter 13 offers debtors some advantages over the liquidation plan under Chapter 7. For example, Chapter 13 allows the debtor a reasonable chance of protecting their home from foreclosure.
An individual may qualify for Chapter 13 as long as their unsecured debt is less than $394,725 and secured debt is less than $1,184,200.
While Chapter 13 has some advantages over Chapter 7, one of its drawbacks is the length of time of the proceeding (three to five years). Unlike Chapter 7, where the process is timely enough to allow a married couple to make a choice of which process – bankruptcy or divorce – to complete first, this may not be feasible under Chapter 13. Instead, due to the lengthy process, it is not uncommon for the parties to initiate one proceeding when the other has already begun.
Initiating a Chapter 13 Bankruptcy While Divorce is Pending
In this case, each spouse should retain their own bankruptcy lawyer to represent them in the proceedings. Since it’s already known that separation is coming, the lawyer for each spouse can represent their client’s individual interests.
Initiating a Divorce While a Chapter 13 Bankruptcy is Proceeding
This is a more complicated scenario and raises several issues that should be considered. These are discussed below.
Bankruptcy attorneys can and do represent both spouses during a bankruptcy proceeding. However, if divorce becomes a possibility, then it’s not possible because each spouse has different needs, and conflicts of interest are created. Therefore, the current lawyer for the married couple likely has to withdraw, and each spouse needs to retain their own attorney.
Plan Payments and Bifurcation
At the heart of Chapter 13 bankruptcy is the repayment plan. If a married couple is obligated by such a plan, initiating divorce proceedings does not remove the plan payment requirements.
If most of the plan is addressing joint debts, then there may not be an issue, and the spouses may continue to make payments while the divorce proceeds. However, if the debt primarily comes from one spouse, this may create some disagreements and unwillingness by one of the spouses to continue paying toward the plan.
In this case, bifurcation may be an option. Bifurcation refers to the process of splitting the bankruptcy into two separate Chapter 13 bankruptcy filings.
Property Divisions or Transfers
During a Chapter 13 bankruptcy, property transfers require court permission. Any property settlements arising from the divorce likely need to be approved by the court.
Need to Make a Decision?
If you have financial difficulties and marriage problems, it is important to consult a local bankruptcy attorney to plan how you will proceed. Fill out our free evaluation, and a local bankruptcy attorney will be in contact to help you make these difficult decisions.