fresh start green plant dreamstime_m_16252166We often hear from people who are having financial problems and also considering divorce. The first question is usually, “Which should happen first? The divorce or the bankruptcy?”

The best answer will depend on many factors. The most common of these are discussed below.

Note, however:  the intersection of divorce and bankruptcy law is complex. In any case, there will almost always be additional issues not discussed below. Be sure you discuss the issues with both your bankruptcy lawyer and your divorce lawyer.

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Bankruptcy and Divorce:  Legal Costs

You must be legally married at the time of the bankruptcy filing if you want to file a joint bankruptcy. Bankruptcy court filing fees  are the same for joint and individual filings.  If you file a joint case while still married, you can save the additional court filing fee.

You will likely also save on bankruptcy attorney’s fees if you file jointly. This is because most bankruptcy attorneys only charge a slightly higher fee for a joint filing (thus saving you 70-80% on attorney’s fees if you file together vs. filing two separate cases with two separate attorney’s fees.)

A bankruptcy filing can also wipe out most of a married couple’s debts. This might greatly simplify your divorce process, thus saving you stress and attorney’s fees when it comes time to divorce.

 Are you Filing Chapter 7 or Chapter 13? 

If you are filing a Chapter 13, you need to be reasonably sure your divorce– when it finally happens–  will not adversely affect your Chapter 13 plan payments and eligibility.

You also need to be reasonably sure you can count on your soon-to-be-ex spouse for cooperation during the Chapter 13 process– which lasts 36-60 months in an average case.

This can mean making plan payments, providing financial documents, attending hearings, and being diligent in cooperating with your attorney and your bankruptcy trustee.

These are tasks that can be stressful under normal conditions. Adding a divorce to the mix can complicate things.

Division of Assets:  Bankruptcy Exemption Planning 

If you and your spouse have a lot assets and you live in a state that doesn’t allow a married couple to “double” bankruptcy exemptions in a joint filing, it might make sense to divorce first and then file two separate bankruptcies.

But, dividing assets just prior to filing bankruptcy can present many issues with regard to preferential,  insider and / or fraudulent transfers.

If the property division is court-ordered, it will resolve some of these issues. But, tread carefully here.

Allocation of Debts in the Divorce

Simplify your Divorce

As mentioned above, allocating debts between spouses is a huge (read: expensive and time consuming) issue in many divorces.

And, even when one spouse is ordered (in the divorce)  to pay a particular joint debt, the other spouse still remains liable to the original creditor.

At least once a week we talk to a potential client who is shocked to find out that his or her former spouse has filed bankruptcy instead of paying the debts allocated to him or her in the divorce.

Example:  Ex-spouse was ordered in the divorce to pay a joint credit card.  Instead of paying, he or she files bankruptcy. Spouse # 2 is still liable to the original creditor, notwithstanding what the divorce decree has to say.

The divorce decree merely gives Spouse # 2 the right to be reimbursed by Spouse # 1 for violation of the divorce decree.

But, trying to collect from an ex usually means spending more money and time in court.

Most people emerging from divorce just want to get on with their lives. So,  it might be better for the spouses to file bankruptcy and wipe out their combined debts before a divorce.

Domestic Support Obligations

Keep in mind that domestic support obligations (“DSOs”) are non-dischargeable in bankruptcy.

Other Financial Obligations Created in the Divorce

Non-DSO debts owed to a former spouse are not dischargeable in Chapter 7, but are dischargeable in Chapter 13.  [83. 11 U.S.C. §§ 523(a)(15) and 1328(a).]

This might affect a bankruptcy filer’s choice of bankruptcy chapter.

Clients who have already filed individual Chapter 13 bankruptcies and who later divorce should be aware that a “new” debt will be created if they agree in the divorce to indemnify or hold harmless spouse # 2 for payment of marital and / or joint debts.

This “new” debt will not be discharged in Spouse # 1’s bankruptcy. This is because only debts that exist on the bankruptcy filing date are eligible for discharge.

Similarly, if Spouse # 1 has not yet filed bankruptcy but knows he or she will be filing imminently, he or she  should not agree to hold harmless / indemnify Spouse # 2 for payment of marital and / or joint debt. Agreeing to hold the other spouse harmless while secretly planning to file bankruptcy constitutes a dishonest divorce negotiation, which will likely just land you back in court sooner or later.

It can also violate bankruptcy provisions that prohibit a person from incurring “new” debt just prior to filing bankruptcy. Several bankruptcy provisions also prohibit discharge if a bankruptcy filer incurs a debt with the intent to discharge it (ie, never intending to pay it back.)

Bankruptcy Means Test and Current Income / Expenses

Sometimes the combined income of a married couple is high enough to make them ineligible to file Chapter 7 together. High combined income will also affect the amount of Chapter 13 plan payments.

It can make sense to divorce first if the resulting lower “household income” makes each spouse eligible to file an individual Chapter 7. The lower household income post-divorce can also make Chapter 13 plan payments lower when the former spouses file two individual Chapter 13 cases.

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Again, this is a complex area of the law and the issues discussed above are only the basics. Be sure both your bankruptcy attorney and divorce attorney are fully aware of your situation.

As with anything else in life, taking the time to methodically plan the divorce and bankruptcy can make all the difference in how these events unfold.