At certain times in life, one bad thing leads to another. This seems to be the case when it comes to bankruptcy and divorce, with the two sometimes being inextricably linked. Whether it is financial problems that lead to marital discord, or it is the divorce itself that brings about unsustainable financial obligations, knowing what to do in this difficult situation is essential in keeping your current quality of life.
The sad reality is that both have the very real possibility of influencing each other and can present major problems if not approached in the proper manner. Understanding your options before, during and after a divorce can keep you from being dragged into a financial-legal crisis.
Prior to Divorce
In an ideal scenario, the bankruptcy filing will be handled prior to the divorce proceeding. This will enable the two parties to mutually decide how to divide their assets in the most equitable manner possible, while also deciding the debt burden that each is obligated to assume.
As long as the parties are still married, they are able to file a joint bankruptcy petition, even if they are separated at the time. This process will usually only work when the parties are able to cooperate with each other and with their attorney. The most beneficial aspect of filing before is that the divorce can proceed with the issue of marital debt having been fixed. This should allow for a more amicable and fair settlement.
Dealing with the bankruptcy process in the midst of a divorce has the potential to make a complicated process even more difficult, but may in fact be necessary, depending on the situation.
Whether one or both spouses in a divorce should file for bankruptcy depends mostly on the amount of debt in each party's name, along with whose name the marriage assets are titled. These assets include houses, cars and financial accounts. Discharging the debt of one spouse, while saddling the other spouse with high levels of money owed, does not fix the overarching issue of who must pay for the remaining marital debts.
Once the spouse files for bankruptcy, the bankruptcy court will issue an automatic stay. This disables creditors from continuing to try to collect any outstanding debts that have yet to be paid. The automatic stay also prevents the divorce court from moving forward.
Similarly, the divorce court will be unable to divide property between the spouses until the bankruptcy court has made a determination of which assets are exempt from the bankruptcy. It must be noted that exempt property cannot be sold by the trustee to pay off debts.
Some formerly married individuals may choose to file for bankruptcy after the divorce with the intention of getting rid of some or all of the debts they were required to pay as part of the divorce order. Specific types of debts, however, are not dischargeable in either a Chapter 7 or Chapter 13 filing. This generally has to do with support obligations, which include child support and alimony. These types of obligation MUST be paid.
Property settlements may be dischargeable in certain scenarios. Non-support obligations, like the money owed in a property settlement, are not dischargeable in a Chapter 7 bankruptcy, but may be in a Chapter 13 filing. This is unless the court finds that the money owed is in fact a support obligation.
For those worried that their spouse will file for bankruptcy after the divorce is finalized, there are some protective options that they have in regard to this. These include indemnity agreements, property lien's, support obligations and title changes on joint debts.
With an understanding of what can be done before, during and after a divorce when it comes to filing bankruptcy, you will be certain to approach this complicated situation in the most efficient manner possible.