Bankruptcy and Divorce

Conquering both bankruptcy and divorce in a close time span can be challenging for anyone. The emotional strain can be hard on any party involved. However, some pre bankruptcy planning may make the process a little less painless and likely a lot cheaper all around.

One important consideration if you are in need of both a bankruptcy and a divorce is whether to file the bankruptcy before or after the divorce. The answer is it depends. Of the many things to consider some of the most important include:

  1. Whether there are any non-exempt assets with equity. If so, doing the divorce first will allow you to use pre bankruptcy planning to preserve assets
    1. Example: Husband and wife have 2 houses, both with equity. If the bankruptcy is filed first, they will likely lose one of the properties. However, if the properties are divided ahead of time, each party moves into one of the properties and then each person files a personal bankruptcy since they would now be divorced; each person would likely be able to protect their own primary residence in the bankruptcy. This does however depend on the amount of equity in the properties.
  2. Whether there is marital debt that would have to be split up in a divorce. If so, filing the bankruptcy first to clear all of the debt would leave no marital debt to be divided.
    1. Caveat: If you and your spouse are at war this may not be the best option for you given that mutual documents and hearings are required.
  3. Whether a divorce before filing with shift income (child support/alimony), and thus making both parties eligible for Chapter 7 bankruptcy where they might have otherwise been disqualified. The “means test” in a bankruptcy looks at household income. If that combined income is too high they may be forced into a Chapter 13 which often creates hardship on the soon to be divorced debtors. In some instances, divorcing prior to the bankruptcy may allow both Debtors to file Chapter 7’s individually where they otherwise would be in the five year repayment plan.

An additional benefit of filing the bankruptcy prior to the divorce is that the joint bankruptcy is then one set of attorney’s fees and one set of court costs whereas if you divorce first then you would each have to file your own individual bankruptcy with its own set of attorney’s fees, court costs, paperwork, etc.

How to Protect Yourself if You Think Your Future Ex-Spouse Will File for Bankruptcy

Does your spouse have a lot of debt that is in his or her own name? Do you think they may file bankruptcy after the divorce? You will want to keep this in mind while determining the terms of the divorce. While domestic support obligations such as child support, alimony, etc. are not dischargeable in any type of bankruptcy, property settlements are dischargeable in a Chapter 13 bankruptcy. Is your spouse “offering” to take on the house debt and in exchange will buy you out and give you ½ of the equity? If he agrees to that in a divorce decree/separation agreement and then files bankruptcy, then his so generous offer of owing you ½ of the equity was just discharged meaning you cannot sue him or require him to pay you. Keep this in mind. Instead of him owing ½ of the equity so that you can afford normal every day expenses, maybe you need support/maintenance also known as alimony but most importantly known as a domestic support obligation which is not dischargeable in any time of bankruptcy.

DSO’s (domestic support obligations) should be distinguished from property settlements as one is dischargeable in certain types of bankruptcy and not dischargeable in other types of bankruptcy while the other is not dischargeable in any type of bankruptcy. A Domestic support obligation is any debt incurred before or after a bankruptcy filing that is owed to or recoverable by a spouse, child or governmental unit; in the nature of alimony, maintenance or support’ established pursuant to the terms of a divorce decree, separation agreement, property settlement agreement, court order or administrative determination. This is not dischargeable in any type of bankruptcy. Property settlements however are an obligation to a spouse, former spouse, or child of the debtor that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other court order, or a determination made under state or territorial law by a governmental authority is non-dischargeable in a Chapter 7 but is dischargeable in a Chapter 13. Attorney’s fees incurred in a child support or custody matter, guardian ad litem fees, and court services fees have all been held to be Domestic Support Obligations and therefore are not dischargeable in a Chapter 7 or Chapter 13 bankruptcy.