Divorces may cost a lot of money, and adding bankruptcy into the mix may not help. Find out if you should file for bankruptcy before or after your divorce.
Going through a divorce is never easy. It can feel even more stressful if bankruptcy is piled on top. If you’ve made the decision to divorce and are worrying about your finances, you are not alone, as 24 percent of bankruptcies in the U.S. result from divorce.
With proper planning, there are ways of making both your bankruptcy and divorce less disruptive and more affordable. One of the first things you’ll need to decide is whether you will file for bankruptcy before or after divorce.
The route you choose may depend on where you live, your financial status, and what type of bankruptcy you’re eligible to receive. Read on to learn more about what to consider when navigating bankruptcy after divorce.
Types of Bankruptcy
There are two main types of bankruptcy declarations in the United States. It’s important to know the difference between them before filing.
- A Chapter 7 bankruptcy cancels qualifying debts in their totality. With Chapter 7, you are absolved of your responsibility to pay the debt back to the creditor.
- A Chapter 13 bankruptcy requires you to agree on a repayment plan with creditors. Sometimes called a wage-earners plan, it enables individuals to repay all or part of their debts.
One of the main reasons couples choose to declare bankruptcy after divorce is to meet the qualifications for Chapter 7. To be eligible, your income must fall below the median for your state. If your joint income puts you over the threshold for filing, it can be advantageous to wait until after you reach a divorce settlement.
On the flip side, if your combined incomes are below the threshold, you may want to declare bankruptcy before divorce. Doing so helps to minimize the financial impact of the divorce settlement.
Why Declare Bankruptcy Before Divorce?
Once you file for bankruptcy, the court will order an automatic stay. The stay prevents creditors from freezing your assets and property while the court reviews your debts and identifies the assets you have remaining to pay for it. The automatic stay remains in place for the duration of the bankruptcy process, so it buys you time and alleviates short-term financial pressure.
Other benefits of filing for bankruptcy before divorce include:
Discharging Marital Debt
One advantage of filing bankruptcy before divorce is you can cut joint marital debts that would otherwise be divided up during your divorce. Most states allow you to keep a larger portion of your combined assets when you file together compared to filing individually.
Deciding which debts are associated with each individual during a divorce is also time-consuming and may increase your fees. You also can’t guarantee that the divorce court ordering one spouse to pay a particular debt will absolve the other of obligations to the creditor.
For example, if your ex was ordered to pay the remaining balance on your joint credit card account but fails to pay or files for bankruptcy, then the creditors can still come to you looking to collect. The court ordered your ex to pay, so you have a right to be reimbursed. But, in practice, this can be difficult. Usually, trying to collect the funds requires you to spend even more on legal fees.
Filing for bankruptcy jointly will cost less than filing separately. You will be able to jointly commission an attorney rather than needing to pay individually. By completing the proceedings before going ahead with your divorce, you’ll also reduce your legal fees. This will contribute to your long-term financial stability and peace of mind.
Quicker Divorce Proceedings
Once a bankruptcy ruling is issued, qualifying debt from both partners will be written off. This can reduce the issues left on the table during your divorce proceedings and speed up the process, saving you time and money.
You don’t need to file for bankruptcy together, even if you are still married. But if it’s possible, you’ll find that it streamlines the process, which can reduce the emotional and financial strain on both parties.
Why Declare Bankruptcy After Divorce?
Filing for bankruptcy jointly can wipe out debts and make dividing assets easier during divorce proceedings. However, before going ahead, it’s important to check the regulations in your state.
If you file before the divorce, you need to make sure that your state gives you enough exemptions to protect the property you own jointly. Depending on where you live, you may have to double the exemption amount by filing together. If you can double your exemptions and you own a lot of property, then filing jointly makes sense.
However, if your state doesn’t double exemptions and you own more property than you can exempt by filing together, it’s often better to file after your property is divided. By doing so, you’ll each have a separate exemption amount, which is likely to be more than the combined allowance.
If you file during an ongoing divorce, the automatic stay will pause the property division process. Your bankruptcy proceedings would need to be finalized before you could continue.
Navigating Bankruptcy and Divorce at the Same Time Is Challenging. Let Us Help.
Juggling a bankruptcy filing alongside your divorce isn’t easy. With so many things happening at once, it can be difficult to decide what’s best: declaring bankruptcy before or after divorce. The final decision will ultimately depend on the relationship between the two parties, the value of your assets, the regulations in your state, and whether you’re eligible for a Chapter 7 bankruptcy.
Husker Law specializes in divorce, bankruptcy, and family law. If you’re considering filing for bankruptcy and divorce, call (402) 415-2525 first. Our attorneys can help you choose the best route for your circumstances and you’ll be able to start your new chapter sooner than you think.