In a desperate bid to avoid financial collapse many floundering homeowners try to save their homes using credit cards to pay daily expenses and, as their situation worsens, even to make mortgage payments. By the time they realize this routine cannot continue, they’re in way over their heads with consumer debt and can’t make those payments either.
All too often money problems capsize marriages. Many people cite divorce as a leading reason for their bankruptcy filing. Caught in vortex of financial and marital desperation, however, many spouses clutch, uncertain what to do. Faced with financial collapse and a marital breakdown, at the same time, many desperate couples wonder whether they should file for bankruptcy first or wait until the divorce is filed or concluded.
Filing for bankruptcy before or after a divorce depends on where the couple lives, how much property and debt they have, and what type of bankruptcy they desire – in short, issues they need to be resolved.
Filing for bankruptcy before a divorce can simplify the issues regarding debt and property division and lower divorce costs. In addition, bankruptcy can be a way to save a house by getting consumer debts cancelled or arranging for payments in a manageable way.
Generally, divorce generally sorts out three often contentious issues: property division, child custody, and spousal and child support. An automatic stay in bankruptcy stops any property division but does not stop the determination of child custody or the payment of support. Thus, if spouses file for bankruptcy before the property is fully divided, that process goes on hold for a while. Since the determination of property rights includes the payment of debts, the bankruptcy often resolves some of those issues.
Bankruptcy filing fees are the same for joint and individual filings. So filing a joint bankruptcy before a divorce can save on court fees. Attorney fees will likely be much lower for a joint bankruptcy than if each spouse files separately. However, the parties must let the bankruptcy attorney know about an upcoming divorce, as there may be a conflict of interest for him or her to represent both spouses. An ethical bankruptcy attorney may not want to represent both spouses upon learning that a split up is imminent because of the potential conflict of interest. Usually divorcing spouses file for bankruptcy jointly because they are freed from all debts, and they are certain that there will be no surprises when the bankruptcy and the divorce are completed.
A married couple, even if they are separated and not living together, can file jointly. After a divorce, they can no longer file jointly, so two filings are required. Thus, by filing jointly, the parties save one filing fee if they file before the divorce.
Couples who file for bankruptcy before filing for divorce should follow through the jointly filed bankruptcy to its conclusion. When a marriage breaks down, many couples savor the fresh start that comes with cleaning up all debts.
It is possible to effect a loan modification and a bankruptcy, and maintain the family house. When trying to keep the family home, it is best to hire a lawyer or seek help from a HUD-approved housing assistance agency. The federal office of Housing and Urban Development (HUD) provides a great deal of useful information. Warnings on these sites about foreclosure recovery scams, advice about saving a family house, and links to free housing counseling and other programs like the Neighborhood Assistance Corporation of America can be helpful.
Chapter 7 vs. Chapter 13 Bankruptcy
Basically, there are two types of divorces for individuals.
A Chapter 7 is a liquidation bankruptcy that removes unsecured debts such as credit card debt and medical bills. In a Chapter 7, the petitioners usually receive a discharge after only a few months, so it can be completed quickly before a divorce.
In contrast, a Chapter 13 bankruptcy lasts three to five years because the petitioners repay back some or all of the borrowers’ debts through a repayment plan. A Chapter 13 may be a better idea for an individual after the divorce because it takes a long time to complete. In Chapter 13 bankruptcy cases, the spouses give the court a plan for paying off some of the debt. The divorcing spouses may want to file separately so that it’s clear whose debt is whose after the divorce, but the parties can have the cases administered together so that they can make the arrangements with creditors consistent with the divorce agreement.
Wiping out debts jointly through a bankruptcy simplifies the property division in a divorce. However, before filing a joint bankruptcy the spouses must make sure that their state permits enough exemptions to protect all property jointly owned. Certain states allow the parties to double the exemption amounts if they file jointly, which works to their advantage if they own a lot of property. In this case, it may be a better idea to file a joint bankruptcy if the petitioners can double their exemptions.
However, if they cannot double their exemptions and they have more property than they can exempt in a joint bankruptcy, it may be more advantageous to file individually after the property has been divided in the divorce. Moreover, a bankruptcy during an ongoing divorce puts an automatic stay on the property division process until the bankruptcy is completed.
Allocation of Debts
Litigating debts assigned to each spouse in a divorce can be a costly and time-consuming process, and ordering one spouse to pay a certain debt in a divorce decree does not change the other spouse’s obligations toward that creditor.
For example, the former husband is ordered in the divorce to pay a joint credit card, but he does pay it and files bankruptcy. The other spouse is still liable for the debt and the creditor can come after her to collect it. If he pays the debt, her former husband can reimburse her because he violated the divorce decree. This holds true even if he filed bankruptcy because he can discharge his obligation to pay the creditor but he cannot discharge his obligations to a former wife under the divorce decree.
However, trying to collect from a former partner usually means spending more money to pursue him in court. As a result, it may be in both spouses’ best interest to file bankruptcy and wipe out their combined debts before a divorce.
Income Qualification for Chapter 7
If spouses intend to file a Chapter 7, the decision to file before or after a divorce can come down to whether they maintain a single household. If they file jointly, they must include combined income in the bankruptcy. If the joint income is too high, they may not be able to qualify for a Chapter 7.
This can happen even if each spouse’s income individually is low enough to qualify on his or her own. This is because Chapter 7 income limits are based on household size and the limit for a household of two is not twice that of a single person household (it’s usually only slightly higher). In that case, it may be necessary to wait until each spouse has a separate household after the divorce to file bankruptcy.
Maintaining a Chapter 13 bankruptcy
A former spouse cannot maintain a Chapter 13 bankruptcy after a divorce. Additionally, if the spouses still live together, the income of both spouses, at least to some extent, must be included in the calculation of the means test to determine if a Chapter 7 is a viable alternative. So, if the combined income is too much, it might be better to wait until they have separated before filing.