Their 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.
Please note: the interaction of divorce and bankruptcy law is complex. In almost every case, there will be additional issues not discussed below. Be sure you discuss the issues with both your bankruptcy lawyer and your divorce lawyer.
You must be legally married at the time of the bankruptcy filing if you and your spouse 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 are also likely to 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. This means you save 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.
Debt is one of the issues that makes divorces complicated and acrimonious.
If you get rid of the debt before filing the divorce, might greatly simplify your divorce process. This in turn could reduce your stress and attorney’s fees when it comes time to divorce.
If you are filing a Chapter 13 bankruptcy, you need to be reasonably sure your divorce– if it is going to happen in the middle of your bankruptcy– 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.
If you divorce during your Chapter 13 bankruptcy, you might be able to amend your Chapter 13 plan or ask the bankruptcy court to bifurcate (separate) your case into two separate bankruptcies.
If the court agrees to let you separate your case into two separate bankruptcies, each person might have several options: to continue as a Chapter 13, convert to Chapter 7, or dismiss the Chapter 13.
Not all options will apply to every case, however.
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.
Tread carefully here.
The bankruptcy court will consider whether there was an equalization payment in dividing the community property from the marriage. The bankruptcy court will also consider whether the division of assets in the divorce was equitable.
The court will also consider whether the “exempt” and “non-exempt” assets were divided between the spouses with an eye towards a later bankruptcy filing.
As mentioned above, allocating joint and / or community debts between spouses is a huge (read: expensive and time consuming) issue in many divorces.
There are usually two issues to keep your eye on: (1) debt owed to original creditors and (2) debts owed between the former spouses as set forth in the divorce decree.
Debts owed to an original creditor are usually dischargeable in bankruptcy.
But if payment for a debt is allocated to spouse # 1 in a divorce, then spouse # 1 also has a “debt” to spouse # 2. This debt is usually not dischargeable in Chapter 7, but might be dischargeable in Chapter 13.
You also have to look at the intentions of the divorce court in allocating the debt to a particular spouse. Was the allocation intended to be in the nature of support? That type of obligation might not be dischargeable in either Chapter 7 or Chapter 13.
Keep in mind that domestic support obligations (“DSOs”) are non-dischargeable in bankruptcy.
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” and higher household expenses make each spouse eligible to file an individual Chapter 7.
The lower household income / higher household expenses post-divorce can also make Chapter 13 plan payments lower when the former spouses file two individual Chapter 13 cases.
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.