Couples routinely mention money-related issues as the main reason for divorce. Many couples heading toward divorce have considered filing Chapter 7 bankruptcy to get a clean slate financially. The complex question that is frequently asked is: Should I file for bankruptcy before or after my divorce is final?
Since every financial situation is different, the answer to this question will be dependent on specific financial factors. In most cases, it is better to file bankruptcy before the divorce proceeding is final. However, there are also cases in which filing for bankruptcy should take place after the divorce is final. Here are the reasons why you should file bankruptcy before or after your divorce.
4 Reasons You Should File Bankruptcy Prior to Divorce
You Will Most Likely Be Able to Keep Your Home
The home that the two of you have worked so many years to live in - and keep - is usually the biggest asset most couples own. In most Chapter 7 cases, the house does not have enough equity to sell. If there is a substantial amount of equity, protecting the asset typically comes down to exemptions. Therefore, the couple is able to keep it as long as they have been living in it when they file bankruptcy. How it is divided in the divorce is another topic altogether.
If the couple has separated or one of the spouses no longer lives in the home, the situation could affect the exemptions in a negative manner. It is best to file bankruptcy while the couple is still living together in the home.
Filing Bankruptcy is Simpler and Less Expensive
The only time a joint bankruptcy petition can be filed is when people are married. Therefore, married couples only pay one filing fee, only fill out one petition, and only need one attorney to handle all of the bankruptcy matters.
Waiting until after a divorce is final means filing two different bankruptcies - and paying double the costs. This is often unnecessary and expensive, especially after going through a divorce.
The Divorce Proceeding is Not Delayed Unnecessarily
Practically speaking, the only matter that is delayed in a divorce due to a bankruptcy filing is the division of assets. The automatic stay, which prevents your creditors from performing any collection actions against you or your spouse, lasts the duration of your bankruptcy, which is approximately four months. During this time, child support and alimony issues, child custody, and visitation can all be worked out, however. While most people prefer to get their divorce over and done with as quickly as possible, if it is best for the couple to file bankruptcy before the divorce is final, four months is not too much time to wait.
You Can Prevent Potential Future Financial Problems
If you get your divorce finalized, all your assets and debts divided, and then your spouse files bankruptcy, it could cause you more financial problems. In divorce proceedings, a Property Settlement Agreement can leave you responsible for debt from the marriage. These agreements are nondischargeable in Chapter 7 bankruptcy (although it might be in Chapter 13). Therefore, if you decide to file bankruptcy after the divorce, you will still be stuck with that debt from the PSA, which is often the majority - or all - of a married person’s debt.
2 Reasons You Should File Bankruptcy After Divorce
The Means TestIn order to qualify for Chapter 7 bankruptcy, you will be required to fill out a means test analysis. Your total household income for the six months prior to filing bankruptcy will be taken into consideration for the means test and it must fall below the median income in the state that you live. If the couple’s joint income is above the standard for the Chapter 7 means test during that period of time, it could disqualify the couple from filing Chapter 7. In cases like this, it might be better to wait until after the divorce has finalized and your household income does not include your spouse’s.
Equitable Distribution IssuesIf your spouse signs a Property Settlement Agreement that gives the house to you, your house is considered an asset of yours and will become part of your bankruptcy estate. This is true even if all of the pertinent paperwork has not been completed for the transfer of ownership. If the house is yours and there is enough equity in it to be sold for a profit, you could lose your house in a Chapter 7 bankruptcy if you cannot use exemptions to protect it.
What Should You Do?
Because divorce and bankruptcy proceedings are so complex and stressful, it is best to hire an attorney who can help you determine the exact process you should proceed with. Every divorce case and every bankruptcy case is different and the intersection of the two can make a situation even more convoluted. The intricacies of both types of proceedings are typically too confusing for anyone without in-depth legal experience to make definitive decisions about, so you should find an experienced attorney who can help guide you through this emotionally exhausting time in your life and show you the right path to go down.