February 8, 2010

Which Comes First – Bankruptcy or Divorce?

Posted in Bankruptcy, Divorce tagged , at 7:24 pm by demetriagraves

Like the long-standing chicken and egg story of which came fist? Bankruptcy and divorce have been viewed in a similar way. It’s a well known fact that financial difficulties often lead to marital problems and ultimately divorce. Then conversely, there’s the cliché of a long and highly contested divorce ending up with bankruptcy as part of the picture. Of course, ideally one should seek some legal advice to prevent a messy divorce which may result in bankruptcy. So this raises some important questions that I’d like to address on the subject of bankruptcy and divorce.

I’m often asked by clients in financial trouble who are contemplating divorce, if they should file bankruptcy first, or wait until the divorce is filed or concluded? This is a good question and there’s no standard black or white decision on this, rather there are many shades of gray. The answer depends entirely on where you live and what issues need to be resolved in the divorce. I offer a free confidential initial consultation where I can go over all your options and work out the best course of action for your individual circumstances. Though here are some general guidelines on this subject.

A married couple, even if they aren’t living together, can file for bankruptcy together.  After the divorce, they can no longer file together, so two cases might need to be filed. Thus, you can save a filing fee if you file before the divorce.  A Chapter 13 filing is where debtors who earn a regular income can develop a plan to repay all or part of their debts. But, and this is a big but, you can’t expect to maintain a Chapter 13 bankruptcy if you are divorced and you should be aware of a number of issues that could adversely affect one of the spouses in a bankruptcy.  So, it’s best to talk to a competent attorney and be completely honest about the domestic situation before filing.  Plus you may find that the attorney, upon learning that a divorce is imminent, won’t represent both of you, because of the potential conflict of interest.

Additionally, if you are still living together, even if the divorce is imminent, the income of both spouses, at least to some extent, will need to be included in the calculation of the means test to determine if a Chapter 7 bankruptcy is a viable alternative. Chapter 7 filings involve having the bankruptcy trustee gather and sell the debtor’s nonexempt assets in order to cover debts owed to creditors. So, if the combined income is too much, it might be better to wait until you have separated before filing bankruptcy.

Generally, there are three things that get sorted out in a divorce: property division; child custody; and spousal and child support.  (Spousal support is also called “alimony.”)  The automatic stay in bankruptcy will stop any property division but won’t stop the determination of child custody or the payment of child or spousal support.  Thus, if you file for bankruptcy before the property is fully divided up, that process will go on hold for a while.  Since the determination of property rights includes the payment of debts, the bankruptcy will often help resolve some of those issues.

If your marriage is breaking up and you’re thinking of divorce, cleaning up your debts will help you get a true fresh start. I’m here to give you the right advice and to help make sure that your start off on the right foot and you’re moving forward in the right direction.

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