Bankruptcy and Divorce Facts and Tips
When is Best to File for Bankruptcy When Divorce is a Consideration?

A person headed for divorce and freighted with debt may want to consider filing for bankruptcy before starting the divorce. A bankruptcy can simplify the divorce because it settles remaining debts and protects the filing spouse from the bankruptcy of his or her soon–to-be former spouse down the road.

Paying the Piper

Both spouses are responsible for the debts incurred during the marriage. A divorce settlement divides the debts, assigning some to one spouse and some to the other. But that divorce settlement is between the spouses; it doesn't bind the creditor, who can collect the debt from either spouse. The creditor can come after either spouse because both have joint and several liability. If a former spouse files for bankruptcy after the divorce, the creditors look to the other to satisfy those debts. Sometimes the bankruptcy of one spouse sends the other into bankruptcy as well.

Bankruptcy is Not an Escape for Everything

Bankruptcy is not a way to avoid alimony, child support, repayment of student loans, repayment for criminal restitution, or outflank a settlement agreement. These obligations cannot be discharged by bankruptcy.

Advantages of Bankruptcy

The main advantage of filing bankruptcy before divorce is knowing, before going into the divorce process, how debts will be handled. That makes it easier to divide marital property and, thanks to the automatic stay connected to all bankruptcies, it eliminates dunning calls and letters from bill collectors.

Two Kinds of Bankruptcies

Individuals filing for bankruptcy choose one of two types: Chapter 7 and Chapter 13. Chapter 7, the so-called "straight bankruptcy," eliminates all dischargeable debt and stays on the debtor's credit report for 10 years, but the debtor emerges from the bankruptcy with a clean slate. Chapter 13 restructures debt so that the debtor takes a longer time to repay but he or she keeps some property, and it remains on the debtor's credit report for seven years. The salient difference between Chapter 7 and Chapter 13 is in the amount of debt that is discharged and what sort of property the debtor is able to keep.

Alimony Protection

The former spouse who is owed money in a property settlement should consider the advantage of having the majority of the funds classified as alimony. Since alimony is non-dischargeable, the strategy protects future cash payments as much as possible. The more debt in a property settlement agreement, the higher the risk that a former spouse may convince the bankruptcy court that certain debts should become dischargeable.

Support Versus Property Settlement

To determine whether one or more debts could be declared as dischargeable in bankruptcy, the court weighs the benefits that may accrue to the debtor against the need and situation of the other party to the divorce. Normally the debtor will not be granted greater benefit than the level of harm that might be done to the other party and/or minor children.

Bankruptcy Protections

Bankruptcy, though it should be a course of last resort, offers many protections. Creditors (including the former spouse) cannot call, or garnish wages, or sue, or repossess anything without the court’s approval. For example, if an ex-spouse is trying to get the house, the bankruptcy delays it. Also, if an ex-spouse is stalling about selling the house or has not been paying the bills, then the bankruptcy can help. The bankruptcy puts a trustee in charge of the bankrupt’s assets. The trustee can force the sale of the house by court order and they will set a price meant to move it. The bankruptcy eliminates unsecured debts.

Eligibility to File for Bankruptcy Like a Business

An individual who owes more than $1 million can file for restructuring like a business using Chapter 11. The action stays on the credit report for 10 years.

Useful Online Tools

Suggested Reading
Divorce & Money: How to Make the Best Financial Decisions
This book is a practical guide to evaluating assets during divorce. It explains how to determine the real value of marital property including houses, businesses, retirement plans and investments and how to negotiate a settlement that is fair to both sides.

Authors: Violet Woodhouse & Dale Fetherling

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ADVANTAGES OF BANKRUPTCY -- Bankruptcy before divorce makes it clear how debts will be handled. That makes it easier to divide marital property.
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