Going through a divorce is a difficult process.
Financial troubles add to the stress of the situation and can prevent someone from starting over. Sometimes, filing for bankruptcy is the only solution.
But which comes first? The answer depends on the situation.
Knowing the intricacies of bankruptcy and divorce is key in the decision-making process. The guide below explores what you need to know if you’re going through divorce and bankruptcy.
Bankruptcy and Divorce 101
Out of 44 reporting states, 827,261 people filed for divorce last year. Health issues, lack of trust, infidelity, the passion “dies,” and loss of communication are all reasons a marriage dissolves.
But more and more, stress caused by money issues and debt leads to a divorce.
In extreme financial hardship, people choose to file bankruptcy. Whether a couple is going through a divorce and needs to file bankruptcy, which should come first depends on many variables.
Where you live, how much debt you have, the total amount of assets, and what type of bankruptcy is being considered are factors.
Chapter 7 Vs. Chapter 13
The federal court system handles bankruptcy, so it follows federal law. In a bankruptcy proceeding, a person or persons petitions the court to relieve them of their debt. There are two ways to relieve debt: forgiving the debt or creating a repayment plan.
Chapter 7 liquidates unsecured assets like credit cards, personal loans, and medical bills and uses the money to pay the creditors. In some states, houses and cars are exempt, meaning the petitioner can keep this property.
A person qualifies for Chapter 7 by taking a means test. This test looks at income and expenses and decides if the person meets certain federal guidelines.
If someone doesn’t qualify for Chapter 7, they can file Chapter 13 instead and the court will set a repayment plan.
Chapter 13 is also called “reorganization bankruptcy” or “wage earner’s plan.” It means that the courts determined that there is enough money left after expenses to repay the outstanding debt. The petitioner keeps all property and repays the creditors over a longer period of time.
Chapter 13 is filed when:
- A person doesn’t qualify for Chapter 7
- Has nondischargeable debts (alimony or child support) in arrears that they’d like more time to pay off
- Have fallen behind on house or car payments and want to catch up
Divorcing couples can file either one as individuals or jointly.
Should You File Jointly?
When the divorce is amicable, a joint petition can be filed including financial information for both parties in the same document. It’s more cost-effective than filing separately and is more efficient. Because it’s one set of paperwork, the fee is the same for both parties.
If each party chooses to file separately, they will have to pay separate fees. For instance, if the cost of filing bankruptcy is $500, a couple filing jointly will pay $500. If they are filing as individuals, they will pay $1,000 ($500 for each filing).
Another benefit of filing jointly is bankruptcy will discharge the qualifying debt of both parties which reduces the issues in divorce court.
When a divorcing couple chooses to file bankruptcy as individuals, bankruptcy will take precedence over the divorce. In other words, the bankruptcy has to be complete before the dissolution of marriage is granted.
Marital debt is the debt accumulated during a marriage. In divorce court, a judge or magistrate decides which debt gets paid by who. It doesn’t mean that the other person is not obligated to the creditor, however, only that one spouse is responsible for paying the debt.
So, if one spouse has to pay on a credit card and doesn’t, the other spouse is still obligated to the credit card company. If the payor refuses to pay the debt, the credit card company can come after the other to pay it.
In this case, if the ex-spouse files for bankruptcy and the other party pays the creditor, the payer can file a motion for reimbursement with the court. Bankruptcy protects a person from a creditor, not their spouse.
Reasons to File Bankruptcy First
If spouses are on amicable terms, choosing to file bankruptcy jointly has many benefits as mentioned before.
Filing individually does as well. If one spouse has a larger salary or income, the other person may qualify for Chapter 7. This makes the division of property easier during divorce proceedings.
Chapter 7 resolves in less than 90 days, which means when it’s time for divorce court, the unsecured debt is already removed.
Chapter 13 takes longer to resolve and both parties are responsible for repayment.
For many divorcing couples, they try to cut the debt before the divorce proceedings because it can make the divorce complete faster which is more cost-effective.
Reasons to File for Divorce First
If a couple’s joint income is too high for Chapter 7 filing or if one spouse has a higher income than the other, it makes sense to finish the divorce first.
In some cases, a married couple doesn’t qualify for Chapter 7 but after the divorce, both qualify on their own.
A divorce will divide real estate property and other assets and decide who pays which debt. If the spouse that wins a house doesn’t pay the mortgage and foreclosure proceedings start, creditors can’t come after the other spouse to collect in most states.
If child support or alimony is a factor in a divorce, it’s easier to go into a bankruptcy knowing what those payments are. The support can be considered during repayment in a Chapter 13 and could lower the amount paid to the creditors.
You Don’t Have to go Through this Alone
SaveYourDollars is one-stop shopping for financial help and advice. If you’re going through bankruptcy and divorce, we can help you sort of your current and future finances.