Is it better to file bankruptcy before or after divorce proceedings? How about during the process? Find out the answer below.
Are you deciding whether to file bankruptcy before or after divorce? Ideally, you should strive to file beforehand. Filing for bankruptcy before your divorce will make your life easier after the divorce.
Also, you’ll stand a higher chance of protecting more of your assets. In other cases, you may have no choice but to file for bankruptcy after the divorce. Overall, the decision depends on several factors, such as the type of bankruptcy and whether you and your spouse get along. Regardless of your choice, the last thing you want to do is file for divorce and bankruptcy around the same time.
This article will help you decide the best course of action. Read further to know more.
Type of Bankruptcy
The type of bankruptcy can determine whether to file before or after a divorce. If you choose Chapter 7, for example, filing before the divorce is the best option.
This is because the Chapter 7 bankruptcy process only takes several months. Moreover, both parties can file jointly to discharge the debts.
You can eliminate debts in the form of:
- Past-due utility bills
- Medical bills
- Personal loans
Moreover, filing beforehand allows you to sever prior agreements, such as mortgages or car loans. In particular, filing before the divorce is a great option if you’re underwater in your mortgage.
Further, you can gain more exemptions in the process. Also, filing before your divorce can protect more of your property.
For instance, perhaps you want to keep your house. Married couples who file bankruptcy together can double the exemption claims. However, not all states will allow the double exemptions, which is why you should check with an attorney.
That said, you may need to file for Chapter 7 bankruptcy depending on your household income. If you file jointly, for example, your incomes may be too high to file for bankruptcy. Therefore, filing Chapter 7 after the bankruptcy is the most prudent decision.
However, there are ways of getting around this problem. If both of you live separately, you can deduct various household expenses to lower your income. Each party should make separate deductions for their homes.
Chapter 13 Bankruptcy
If you’re filing for Chapter 13, filing for bankruptcy after a divorce may be the best choice because the process can take three to five years. If you divorce within that time frame, you must either close or separate the bankruptcy case, which isn’t always feasible.
Overall, Chapter 13 differs from Chapter 7 because Chapter 13 requires a payment plan. On the other hand, Chapter 7 will discharge all qualified debts.
The payment plan under Chapter 13 can last three or five years. During this payment period, you can file for divorce. If you file for divorce, you can cancel or structure the payment plan. Both options have the following outcomes:
- Cancellation: If you cancel the repayment plan, you and your spouse are still under obligation to pay the debts.
- Restructure: You and your spouse will handle the restructuring individually.
The restructure route can be tricky, which is why you should involve an attorney. Attorneys can streamline the process and help you avoid missteps.
Bankruptcy can be a joint effort if you and your spouse are on friendly terms. If you file before the divorce, you must count on your spouse to go through the process.
They must submit the necessary paperwork and attend hearings if necessary. If you’re on hostile terms with your spouse, or if your spouse is unreliable, then filing after the divorce is the best option.
Filing for Bankruptcy and Divorce at the Same Time
You should avoid filing for divorce and bankruptcy due to the complexity involved. If you file before the divorce, an automatic stay goes into effect. This automatic stay will stop creditors from petitioning your assets.
Moreover, it will place a freeze on all assets. This stay allows the courts to sort through all assets and debts. If you filed for divorce during this process, the family court cannot divide the assets due to the freeze.
Therefore, the court must wait until the bankruptcy matter settles. As a result, your divorce could drag out longer, causing more stress in the process.
Filing After a Divorce
If you must file after a divorce, you would follow the same procedures as any other individual filing for bankruptcy. Let’s say you’re filing for Chapter 7 bankruptcy. As an individual, you would gather the necessary documents, such as:
- The last two years of federal and state income tax returns
- All documents noting your assets
- The hast six months of your income (i.e. pay stubs)
- A list of all debts
When it comes to your divorce, include the divorce decree and any documentation noting your ex-spouse’s debt obligations. You should also include miscellaneous documentation, such as attorney bills or property settlements. From there, you’ll proceed with the normal bankruptcy steps.
For example, you’ll take the required credit counseling course, complete the bankruptcy forms, and file the bankruptcy forms. Regardless of your filing status, the bankruptcy process can get complex. Therefore, consider a bankruptcy attorney to guide you from beginning to end.
Filing for Bankruptcy Before or After Divorce: What’s the Verdict?
Overall, filing before a divorce is the best option. However, there are situations where filing after divorce is better. For example, the incomes of you and your spouse may disqualify you both.
With that, filing before the divorce can protect more of your assets through exemptions. This approach also discharges unwanted debts that tie you and your spouse together, such as mortgages or car loans.