When Should You File Bankruptcy, Before or After a Divorce?

Jennifer Jakob-Barnes is a Bankruptcy Attorney in Georgia.

 

By: Jennifer Jakob-Barnes, Jakob-Barnes Law Firm, LLC

Couples who are currently married can file bankruptcy together, even if they have separate households.  Once a divorce is final, a couple can no longer file bankruptcy together.  If there is an impending divorce it may benefit the couple to file bankruptcy before the divorce is final.  I only suggest investigating the possibility of filing a Chapter 7 bankruptcy together, not a Chapter 13 bankruptcy.

A Chapter 7 bankruptcy is a liquidation of assets.  The Trustee wants to liquidate any assets that an individual has that cannot be exempted by state law.  The Trustee uses the money to pay the creditors.  Most Chapter 7 bankruptcies are considered no asset chapter 7 bankruptcies because the individual has no assets to liquidate.  An experienced bankruptcy attorney can apply state specific exemption to the assets and advise base on the assets whether a Chapter 7 bankruptcy is the best option.  To file a Chapter 7 bankruptcy, once must qualify based on the household income for the last 6 months.  At the end of a Chapter 7 bankruptcy, the individual receives a discharge from unsecured debt, meaning the individual is no longer liable to pay the debt.  Debt that is secured by Property (mortgage or car loan) must be paid if the individual is keeping the property.  A Chapter 7 bankruptcy is considered a fresh start.  Many people are able to keep their house and car in a chapter 7 bankruptcy when there is little or no equity.

A Chapter 13 bankruptcy is a repayment plan.  In a Chapter 13 bankruptcy, the individual always has to pay for items he will be keeping.  For example: if the individual wants to retain a home with a mortgage, the Chapter 13 plan has to include any amount the individual is behind on the mortgage when he filed the bankruptcy case and the individual has to continue to pay his monthly ongoing mortgage payments.  Chapter 13 plans are either 3 or 5 years in length depending on the individual’s income.  Individuals have to pay between 0% and 100% of their unsecured debt through a Chapter 13 plan.  An individual’s income and assets are factors that help determine the amount that has to be paid to unsecured creditors in a Chapter 13 plan.

If a couple has all unsecured debt and wants it discharged in a Chapter 7, they should file for bankruptcy before or during the divorce proceedings, if they qualify together.  The benefit is the couple saves on attorney’s fees and filing fees. The Court charges the same filing fee whether the case is filed joint or single. Most attorney’s charge very similar fees on Chapter 7 cases whether the case is joint or single.  Also, many couples are cosigned on debt together.  If only one spouse files for bankruptcy and the other spouse is cosigned on the debt, the other spouse will be responsible for the debt if they do not also file for bankruptcy.

If the couple does not qualify for a Chapter 7 bankruptcy with both incomes included, they can either wait until after the divorce is final or wait until they are living in separate households.  When determining whether a person qualifies for a Chapter 7 bankruptcy, one must look at the household income.  If one is married but separated from their spouse, they can filed married with a declaration of separate households.

Filing for a bankruptcy during a divorce will hold up a property division until it has been determined that there are no assets or the assets have been liquidated for the creditors in the Chapter 7 bankruptcy.  Division of property in a divorce includes the division of debts.  If one or both of the parties file bankruptcy it often helps resolve the issue of the division of debt.  When debts are divided in property divisions, the creditors are not involved and the original loan documents are not altered.  If there is a default in payment, the creditor will pursue the person on the loan documents, not the person responsible through the divorce decree.  A bankruptcy does not hold up the determination of child support or alimony.

If there is a impeding or pending divorce, I do not suggest filing a joint Chapter 13 bankruptcy.  Since the Chapter 13 bankruptcy is a repayment plan, it would have to be determined who is to make the monthly Chapter 13 payment after the divorce is initiated and the monies are no longer comingled.  Also, many times after  a divorce the parties want their debts to be handled differently and there could be a conflict of interest with an attorney representing both parties.

Financial stress is one of the leading causes of divorce and bankruptcy!

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