When Divorce and Bankruptcy are On the Table, Consider Both Together
Money is a factor in many divorces, and often at least one party is contemplating filing bankruptcy at the same time the couple are considering divorce.
Both spouses are equally responsible for debts incurred during a marriage. A divorce settlement will divide the debts between the two parties, but creditors can still attempt to collect from either spouse. If your spouse doesn’t stay timely with his or her debt payments, creditors will come to you to make up the difference.
Say you and your spouse got divorced and split your debts, and then your ex-spouse filed for bankruptcy. You are still responsible to the creditor for the entire debt. However, the divorce agreement is a judgment that you can use to force your ex-spouse to pay his or her share.
In order for both of you to be free of the debt, you must both declare bankruptcy. If you do so, your debt burden will decrease, but your credit will suffer. If you decide instead to pursue legal action against your spouse, your credit will remain intact, but you will both have to make good on the debt. Either option will incur its own legal fees.
For this reason, divorcing couples who anticipate either or both parties struggling to stay current with debts are well-advised to weigh all their divorce and bankruptcy actions at the same time. It may be prudent to declare bankruptcy jointly before divorce.
Filing fees for individual and joint bankruptcies are the same, and attorney fees are likely to be much lower for a single joint bankruptcy than for two individuals bankruptcies. If filing for joint bankruptcy before divorce, be sure to let your attorney know that divorce may be in your future. It could represent a conflict of interest for the attorney to represent you both in bankruptcy.
Exemptions allow you to protect certain assets from going to your creditors during your bankruptcy. In Florida, couples filing joint bankruptcy are allowed to double many exemptions.
A Chapter 7 bankruptcy is a liquidation to discharge your unsecured debts. A Chapter 7 can usually be completed within a few months. Therefore it is a viable option even if you are definitely planning for divorce.
A Chapter 13 bankruptcy, on the other hand, is a plan to reorganize your debts and repay your creditors under court supervision. A Chapter 13 often lasts several years and is therefore probably better filed after divorce.
In order to file Chapter 7 bankruptcy, your household income must fall below certain limits. The limit for a joint bankruptcy is not twice that of individual bankruptcy – it is usually only a bit higher. Therefore, if both you and your spouse are gainfully employed, it may be necessary to get divorced before filing Chapter 7 bankruptcy.