Should you file for divorce first before you file for bankruptcy? Or should it be the other way around? Read on to learn more about how to best manage the sequencing of these events.
Have you found yourself at two significant crossroads in life? Thousands of Americans find themselves needing to end their marriages and file bankruptcy about the same time.
The way you proceed, however, is critical to what happens next. Should you file for bankruptcy first or should you wrap up your divorce?
You should choose bankruptcy first over the divorce. Doing both at the same time or filing for divorce first can delay the assessment and distribution of your marital assets and liabilities until your bankruptcy is complete.
You can’t get divorced while you are in bankruptcy proceedings. If you are about to embark on significant life changes, read this first.
Why You Should File for Bankruptcy First
If you and your spouse are splitting amicably and want to distribute your assets and liabilities evenly, then it’s crucial you complete your bankruptcy first. Here’s how it can even simplify your divorce.
1) Eliminate your joint debts
By filing for joint bankruptcy as a married couple, you address all your debts in a single case. Doing so wipes all joint debts and can be beneficial for your exemption limits. It also eliminates loans that neither of you wants or can afford.
For example, if your mortgage payments are months behind, whoever wins it in the divorce is saddled with a huge liability. It’s easier to release the property through bankruptcy while married than fight over who should deal with it after the divorce.
2) Qualify for Chapter 7 bankruptcy
Filing for bankruptcy while married increases the chance you can file for a Chapter 7, particularly if one spouse makes substantially more than the other.
If you’re the primary earner, you’ll struggle to qualify for Chapter 7 on your own.
Why is Chapter 7 bankruptcy often preferred? First, it wraps up more quickly – usually in about 90 days. You’re then free to pursue your divorce. Second, you get rid of your unsecured debt, which removes a considerable burden from the divorce negotiations.
Filing Chapter 13 bankruptcy complicates any divorce. The resolution ties you to each other as both must contribute to the repayment plan. You also can’t divide your assets according to sale.
3) Settle a quick divorce
If filing for bankruptcy first allows you to secure Chapter 7 bankruptcy, it will speed your divorce proceedings.
Chapter 7 bankruptcies wrap up faster and are more decisive. You finish your bankruptcy within three to six months. You can then start your divorce knowing your assets and liabilities. After a successful bankruptcy, their division is more straightforward.
Easy division of marital assets often means less time spent to reach a divorce agreement.
Reasons to File for Divorce First
If you both don’t qualify for a Chapter 7 bankruptcy thanks to your joint income, then filing for divorce first might make sense. You both can be better poised for Chapter 7 when your spouse’s income doesn’t work against you.
Filing for divorce first can sway your bankruptcy proceedings. If your divorce requires a significant spousal or child support liabilities, then you need to know before you file for bankruptcy.
For example, if your net salary is $7,000 per month, but you owe $4,000 in support, then your net pay is only $3,000 after liabilities. If your chapter 13 bankruptcy payment plan accounts only for your pre-support wage, then your repayments may be based on $7,000 – not the $3,000 you keep.
The impact of this can be devastating for your finances, which are already precarious in the aftermath of your bankruptcy.
Remember: Not All Debts Disappear
As you plan, it’s important to remember bankruptcy won’t discharge all your debts. You typically won’t get a break on:
- Student loans
- Other fines owed to government agencies
- Court fines
- Alimony and child support
- Attorney fees related to child custody/support
Additionally, a Chapter 7 bankruptcy discharges debts as a privilege – not a right. It may not include all your debts, and the court has the right to deny your application altogether.
This is another reason why it’s a better idea to file for bankruptcy before a divorce. Regardless of whether you file for Chapter 7 or 13, knowing what debts you are liable for as a couple before you file for divorce will impact your divorce.
Don’t File for Both at Same Time
Whether you file for bankruptcy or divorce first depends on your debts, income and the state of your marriage. There are solid arguments for both options.
But whatever you do, don’t file for both divorce and bankruptcy at the same time.
If the two overlap, the bankruptcy automatically places a hold on your divorce. No family court can access, assess and divide your assets. Your divorce will take longer, be more expensive and cause more emotional turmoil for your family.
Why will it be more expensive? Not only will you require more attorney hours, you need to hire another attorney.
An attorney who represents you during your divorce can’t represent you as a couple in bankruptcy proceedings. You will need to hire a new attorney – and pay their retainer and legal fees.
Each Bankruptcy and Divorce Are Unique
As a general rule, you want to file for bankruptcy before you file for divorce. Once you settle your bankruptcy, you can better divide your assets and liabilities to reach a fair agreement.
In some cases, filing for divorce works in your favor. A review of your finances often indicates whether your divorce can still be amicable.
However, never file for divorce and bankruptcy at the same time. Not only will your divorce take longer, but both proceedings will cost substantially more in time and energy.
Are you and your spouse at two significant crossroads? Don’t go blind into your divorce or bankruptcy. Discuss your case with a highly experienced lawyer to find the best path through each case. Call Husker Law at (402) 415-2525 today!