Filing for bankruptcy in conjunction with a divorce can be very attractive to a couple whose marriage is breaking up because it affords the spouses the chance of “a true fresh start.”
Divorcing couples weigh whether to file for bankruptcy first or wait until the divorce is filed or perhaps concluded. The decision depends on the state where a party lives and the issues that must be resolved.
A divorce deals with three large issues: property division; child custody; and spousal and child support. In bankruptcy actions, an automatic stay stops any property division but does not freeze the determination of child custody or the payment of support. Partners who file for bankruptcy before the property is divided puts the process on hold for a time. Since the division of property also includes the division of debts, the bankruptcy resolves some of those issues.
A divorcing couple, even when they are separated, can file for bankruptcy together, but after a divorce is final former spouses cannot do that. This means that two bankruptcy actions must be filed. So a couple filing for bankruptcy before filing for divorce can save on the filing fees.
A divorced couple cannot maintain a Chapter 13 divorce. A Chapter 13 allows the couple to protect some assets and work out a repayment schedule over a period of years.
A Chapter 7 action, which for the eradication of installment debt, requires that the income of both spouses to be used in a means test. If the combined income is too high, most couples wait until separating to file for divorce.