It’s certainly not uncommon for bankruptcy to occur during or just after a divorce. Your life, including your finances, are sent through a whirlwind and sometimes just don’t settle in a favorable manner. I was reminded of the complexities and frequency of bankruptcy accompanying a divorce procedure when a client recently came into my office asking for the details of filing for bankruptcy. While this snapshot won’t provide all the miniscule details of such a decision, or the process of making this decision, I do think the following will help those in the throes of dealing with financial challenges.
Whether you should file a bankruptcy before or after a divorce depends on where you live, how much property and debt you have, and what type of bankruptcy you wish to file.
- What are the Costs of Filing for Bankruptcy?
Bankruptcy filing fees are the same for joint and individual filings. So filing a joint bankruptcy with your spouse before a divorce can save you a lot on court fees. Also, if you decide to hire a bankruptcy attorney, your attorney fees will likely be much lower for a joint bankruptcy than if each of you filed separately.
However, you should let your bankruptcy attorney know about your upcoming divorce as there may be a conflict of interest for him or her to represent you both.
Filing for bankruptcy before a divorce can also simplify the issues regarding debt and property division and lower your divorce costs as a result.
- How do I File?
A Chapter 7 is a liquidation bankruptcy designed to get rid of your unsecured debts, such as credit card balances and medical bills. In a Chapter 7, you usually receive a discharge after only a few months, so it can be completed quickly before a divorce.
In contrast, a Chapter 13 bankruptcy lasts three to five years because you have to pay back some or all of your debts through a repayment plan. So if you were looking to file a Chapter 13, it may be a better idea to file individually after the divorce, due to the lengthy nature of the process.
If you intend to file a Chapter 7, the decision to file before or after a divorce can come down to figuring your income when you maintain a single household. If you wish to file jointly, you must include your combined income in the bankruptcy. If your joint income is too high, then you may not be able to qualify for a Chapter 7.
- Do I File before or after the Divorce?
Wiping out your debts jointly through a bankruptcy will simplify the property division process in a divorce. However, before filing a joint bankruptcy you must make sure that your state allows you enough exemptions to protect all property you own between you and your spouse. Certain states allow you to double the exemption amounts if you file jointly. So if you own a lot of property, it may be a better idea to file a joint bankruptcy.
If you can’t double your exemptions and you have more property than you can exempt in a joint bankruptcy, it may be more advantageous to file individually after the property has been divided in the divorce. Also, keep in mind that if you file bankruptcy during an ongoing divorce the automatic stay will put a hold on the property division process until the bankruptcy is completed.
- How long will the negative information impact my credit file?
The record of your bankruptcy will impact your credit report for 7 years for completed Chapter 13 bankruptcies; 10 years for Chapter 7 bankruptcies. Consider this impact carefully as you make your divorce and post-divorce plans.
Bankruptcy, like divorce, is a very complicated issue and needs to be carefully considered. Be sure to talk to your divorce team before making any moves or discussing with your soon-to-be ex. Being informed can make all the difference in the world as to how to make every decision to your advantage.
