Bankruptcy & Divorce: Which Should You File for First
Divorce is never easy. If you and your former partner are also dealing with insurmountable debt, it is even more difficult, especially if you are in a position where you need to file for bankruptcy. Facing divorce and bankruptcy at the same time can be incredibly overwhelming, and you may not know how to proceed. Do you file for bankruptcy first and then divorce? Or should you file for both simultaneously?
Bankruptcy Overview
There are two types of bankruptcy filings available to individuals and married couples: Chapter 7 and Chapter 13. Chapter 7 bankruptcy (also referred to as liquidation bankruptcy) involves selling your property to pay off as much of your debts as possible. At the end, your unsecured debts are usually discharged. Chapter 13 bankruptcy (also called debt reorganization bankruptcy) involves restructuring your debts and developing a court-mandated repayment plan that lasts three to five years. Once you have completed your repayment plan, any remaining debts are typically discharged.
Note: the following debts cannot be discharged through a bankruptcy filing:
- Auto loans
- Child support
- Mortgages
- Spousal support (alimony)
- Student loans
- Tax debts
Not everyone will qualify for Chapter 7 bankruptcy. Eligibility for Chapter 7 filings is based on a "means test." The test is based on a calculation that considers several factors, including your monthly income, family size, and expenses. Generally speaking, if your monthly income is less than the median income for a household of your size, you will likely qualify for Chapter 7.
The Cost of Filing for Bankruptcy
When filing for bankruptcy, you must account for both filing fees and attorneys' fees. Filling fees can be several hundred dollars, while attorney fees, depending on your situation, can be a few thousand. The total cost of filing for bankruptcy will vary from case to case. You will also be required to take a credit counseling course, which typically costs money.
Another thing that affects the bankruptcy filing cost is whether you are filing with your spouse or separately. Keep reading to learn more.
Filing Jointly vs. Separately
As mentioned above, whether you will file individually or together can impact how much you ultimately pay to file bankruptcy. Therefore, if you are considering filing for bankruptcy and also will be divorcing your spouse, you and your spouse should consider whether you want to file for bankruptcy jointly or separately. Many divorcing couples with shared debts and who are still on amicable terms choose to file jointly to save on filing costs and attorneys fees.
If the debt you are dealing with is shared debt and you both are planning to file for bankruptcy post-divorce, you may want to consider filing jointly before divorcing to reduce the financial burden of filing separately. However, there are also reasons why it may be better for both of you to file separately.
Reasons to consider filing for bankruptcy individually include:
- Only one of you is planning to file
- Debts are only in one person's name
- You and your spouse have always kept your finances separate
- Your spouse has filed for bankruptcy in the past and isn't currently eligible for discharge
- You or your spouse will be receiving an inheritance within 180 days of filing (in these cases, the inheritance may become part of the bankruptcy case)
- Your combined income disqualifies you for a Chapter 7 filing
Going through a bankruptcy filing is incredibly stressful and requires a lot of cooperation between spouses. Similarly, if you are filing for Chapter 13 bankruptcy, you will have to continue working together to ensure that the repayment plan is completed successfully. This could mean continuing a working relationship with your spouse for three to five years post-divorce. If you are not up for this, it may be best to file individually after your divorce is finalized.
The Benefits of Filing for Bankruptcy Before You Divorce
While you do not have to file for bankruptcy before your divorce, it may be in your best interest if the debts you are dealing with are marital debts that must be handled as part of the divorce process anyway. If you want your debts discharged without going through the Chapter 13 reorganization process, filling before your divorce may help you qualify for Chapter 7 bankruptcy. For example, there are situations where an individual's income is too high to be eligible for a Chapter 7 filing, but with their spouse included, they do qualify.
Regardless of what type of bankruptcy you are planning to file for, if you are also getting divorced, you should speak with your divorce attorney before filing for bankruptcy. They can help you determine if you should file before or after your divorce. They may also be able to give you insight into the impact a bankruptcy filing will have on your divorce case.
To schedule an appointment with one of our divorce attorneys, reach out to the Law Office of Greg Quimby, P.C. We have extensive experience handling all types of divorce cases, and we can use our knowledge and know-how to help you.