5 Things You Need to Know About Bankruptcy and Divorce

Divorce and bankruptcy are often two intertwined processes within a couple's life in that one can lead to the other, or at times they can occur concurrently. Periods of financial uncertainty are some top causes of the many turmoils leading to the final breakup of many marriages. One or both spouses can be negatively impacted by the divorce, as wealth is split and other financial responsibilities like spousal maintenance may pop up.

Filing for bankruptcy at the right time can help mitigate some financial burdens associated with the divorce. The order that spouses choose to file for bankruptcy matters a lot and may have huge financial and emotional ramifications. Every marriage situation is unique, so are the effects of filing for bankruptcy at a certain time within or after the divorce. 

Let’s go through five things that will enable you to learn more about which action plan best suits your scenario. Read on!

#1: Know the Bankruptcy Types You Can File

There are two types of bankruptcy methods one can choose to file;

Chapter 7 Bankruptcy

This is the quickest route to settle your divorce and with the most financial advantages. It’s advisable to file for this type of bankruptcy before divorce as all eligible debt and liability can be eliminated within six months. Filing this type of bankruptcy jointly with your spouse will take care of both your debts and save both of you from paying separate legal fees for the process. Most couples considering this form of divorce prefer to file for bankruptcy first.

Chapter 13 Bankruptcy

This bankruptcy method involves a plan to pay all debts in installments spread throughout 3 to 5 years considering a couple's financial capabilities. Chapter 13 can have the benefit of getting more exemptions for high-value assets hence retaining more property. The downside to this method is the length of time it will cost and its ability to become complex if not executed correctly. Filing for divorce first is pretty common in this case as many couples can’t wait for that length of time. 

#2: Be Aware of All Your Debt

You should be fully aware of all your debts, more so if you settle for the debt elimination route (chapter 7), before initiating the bankruptcy filing. It’s pertinent to also know what category your debt is classified in to know the ones that can be overruled in a bankruptcy process. Below are common debt categories and how they are handled in bankruptcy; 

Secured debt: These are properties that one acquires through debt and are considered as collateral for the debt and risk being repossessed if the debt is late in being serviced. They can be cars, houses, or any other property tied up with debt. During bankruptcy, such property can be repossessed as a way of settling the payment if one is late in servicing it.

Unsecured debt: They are considered dischargeable debt in bankruptcy and are not tied to any kind of property. They include credit cards and medical bills. Although, there are conditions laid down in the Bankruptcy Code that can make these bills non-dischargeable if the debtor forfeits them and it’s proven by a bankruptcy court that they didn’t abide by them. A professional bankruptcy attorney can guide you through the several rules to know which ones you can have discharged and under what conditions.      

Non-dischargeable debt: You will keep paying these debts even after a bankruptcy ruling as they are considered non-dischargeable under any circumstance. They include student loans, government fines, court fines, child support, alimony, among others. 

#3: Make a Divorce-Related Cost Analysis

It’s prudent for couples to make this analysis earlier on before filing for either bankruptcy or divorce as this will aid in choosing the best option suited for them and in the process save them both money. Filing a joint bankruptcy as a married couple will result in the same legal fees as filing as a separate individual. Settling for a joint case will also help in accelerating the overall divorce process as debt issues will be dealt with easily. To do this successfully, it’s paramount to be on good terms with your spouse for a smooth process.  

One should also be conscious of how the bankruptcy/divorce process is affecting their expenses by always keeping tabs on them. This might help in the final division of debt if required.

#4: Know If Your Combined Income Will Qualify for Chapter 7

Filing for bankruptcy under chapter 7 is the default most preferred method for most couples because of the ease and relatively fast process. Whether filing for bankruptcy or divorce comes first will depend on if your combined income will qualify for chapter 7 bankruptcy filing or not. This applies provided you are still legally married, whether or not you file for bankruptcy alone or jointly. To qualify for chapter 7, the combined income will need to pass a ‘means test’ to assess the income limits. If the combined household income is too high, the only alternative will be chapter 13. 

The only way to be eligible for a chapter 7 under this scenario will be to initiate a divorce first and when it’s successful and you are legally divorced, only your income will be used in a ‘means test’. 

#5: Know How to Maximize on Bankruptcy Exemptions

One is qualified to get a certain amount of property exemptions when they file for bankruptcy to cushion them financially as they start over. This can be employed as a way to ensure property protection. Most states give couples the privilege to claim twice the number of exemptions when they file for bankruptcy jointly as compared to when they file separately. Those with many properties can apply this tactic to protect their properties after filing for bankruptcy.

Engaging an experienced attorney is recommended to get an expert opinion on how to go about it.  For this to work well, you must be on amicable terms with your spouse, which can be hard when divorce is around the corner.