Bankruptcy and Divorce – Bankruptcy During Divorce

All too often money problems lead to divorce. So it’s normal that a bankruptcy (or two) will be part of the picture.

Should you file bankruptcy first, or wait until the divorce is filed or concluded? A good question. The answer depends entirely on where you live and what issues need to be resolved in the divorce.

THE MYTH: Bankruptcy leads to divorce.
THE REALITY: Bankruptcy isn’t the problem – not being able to pay the bills is. Filing bankruptcy often strengthens a marriage by relieving the financial stress.
THE MYTH: Divorce and bankruptcy are two totally separate legal proceedings; neither one will have bearing upon the other.
THE REALITY: Property awarded in a divorce can sometimes be used to pay creditors in bankruptcy. Divorce may break you up legally, but financially you are still tied to each other. On the other hand, bankruptcy deals only with debts that are in existence the day you file bankruptcy.

A married couple, even if they aren’t living together, can file for bankruptcy together. After the divorce, they can no longer file together, so two cases might need to be filed. Thus, you can save a filing fee if you file before the divorce. But, and this is a big but, you can’t expect to maintain a Chapter 13 bankruptcy if you are divorced and you should be aware of a number of issues that could adversely affect one of the spouses in a bankruptcy. So, it’s best to talk to a competent bankruptcy attorney and be completely honest about the domestic situation before filing. And, you might find that the bankruptcy attorney, upon learning that a divorce is imminent, won’t represent both of you, because of the potential conflict of interest.

Additionally, if you are still living together, even if the divorce is imminent, the income of both spouses, at least to some extent, will need to be included in the calculation of the means test to determine if a Chapter 7 bankruptcy is a viable alternative. So, if the combined income is too much, it might be better to wait until you have separated before filing bankruptcy.

Generally, there are three things that get sorted out in a divorce: property division; child custody; and spousal and child support. (Spousal support is also called “alimony.”) The automatic stay in bankruptcy will stop any property division but won’t stop the determination of child custody or the payment of child or spousal support. Thus, if you file for bankruptcy before the property is fully divided up, that process will go on hold for a while. Since the determination of property rights includes the payment of debts, the bankruptcy will often help resolve some of those issues.

It’s crucial to obtain expert legal advice. Your divorce attorneys and your bankruptcy attorney need to coordinate their strategy on your behalf!