Bankruptcy and divorce: What to consider when deciding which comes first
It is critical that couples take several financial and legal issues into account when choosing whether to file bankruptcy or get divorced first.
Financial issues can be a source of strife for many couples in Kansas. Sadly, a Kansas State University study that was published in 2013 even found that financial arguments are a top predictor of divorce. Considering this, it is not surprising that many people who face overwhelming debt and choose to seek relief through bankruptcy may also be preparing to file for divorce.
It is usually not advisable to file for bankruptcy and divorce simultaneously, and the order that a couple chooses to proceed in can have huge impacts, financially and otherwise. As a result, it is important that consumers know what factors to keep in mind when deciding which process should come first.
Type of bankruptcy
Chapter 7 bankruptcy, which involves repayment of debt through liquidation, can be completed relatively quickly, which may allow spouses to discharge all of their eligible debts before divorcing. However, consumers must pass a means test to qualify for Chapter 7 bankruptcy. Spouses who do not qualify because their combined income is too high may benefit from filing separately after divorcing.
Spouses who are considering filing Chapter 13 bankruptcy might benefit from waiting until after divorce for a few reasons. Chapter 13 bankruptcy requires a repayment plan that takes three to five years to complete, which means the debt discharge will likely not take place until after the divorce is finalized. Filing Chapter 13 bankruptcy following divorce may also be preferable because resulting obligations, such as child support or alimony, can be taken into account when the repayment plan is drafted.
The specific costs associated with filing bankruptcy before or after divorce may also help a couple decide which option is ideal. The fees for a joint bankruptcy case and an individual case are the same, so filing jointly before divorce can reduce per-person costs. Additionally, filing bankruptcy first may expedite the divorce settlement process by simplifying the division of debt or even eliminating the need for such a division. This can help lower divorce-related costs for both spouses.
Filing bankruptcy before divorce can also reduce the risk that one spouse will be left liable for debts that the other spouse agreed to pay. Creditors are not bound by the terms of a divorce decree, so even if all debts have been assigned to one spouse, creditors may continue seeking payment from the other. This can make it advisable to resolve liabilities through bankruptcy prior to divorce.
Conflicts of interest
In some cases, spouses may want to delay filing bankruptcy until after divorce due to potential conflicts of interest. Each spouse’s interests may be better served by a different chapter of bankruptcy, given discrepancies in personal income, assets and liabilities. Additionally, it may not be feasible for couples in high-conflict relationships to look objectively at their options and come to agreement on important issues, such as which chapter of bankruptcy to file.
Before deciding when to file bankruptcy, spouses should consider reviewing their options with an attorney who has experience in this area of law as well as divorce. An attorney may be able to help a couple assess their situation and evaluate the potential benefits and pitfalls of each approach.