Bankruptcy and Divorce: Which First?

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It's not uncommon for divorcing couples to also file for bankruptcy. Some divorcing couples have strugged with debt for years, and others face new financial troubles because of changed living and financial circumstances. If you are considering both divorce and bankruptcy, it's wise to consider which to do first. Your decision on the timing may affect whether you can qualify for Chapter 7 bankruptcy, how much property you get to keep, the costs of your bankruptcy and divorce, and more.   

Do You Want to File for Chapter 7 or Chapter 13 Bankruptcy?

In Chapter 7 bankruptcy, you discharge most of your debts and in return, may have to give up some property. Because the whole process takes only a few months, it would be possible to wait until a bankruptcy is complete before getting a divorce. 

In Chapter 13 bankruptcy, on the other hand, you keep your property but pay off some or all of your debts over a three to five year period. The long period before the bankruptcy is over makes it unrealistic for most couples to complete a Chapter 13 bankruptcy before getting divorced.

(To learn more about these two types of bankruptcy, see our Chapter 7 and Chapter 13 Bankruptcy area.)

Will Divorce Make it Easier to Qualify for Chapter 7 Bankruptcy?

In order to qualify for Chapter 7 bankruptcy, you must take and pass the "means test." If your income compared to certain expenses is too high, you will be required to file for Chapter 13 bankruptcy instead.

If there is a big discrepancy between what you and your spouse earn, it may make more sense to divorce before filing for bankruptcy.  If you earn significantly less than your spouse and you file for bankruptcy after the divorce, you may have a better chance of qualifying for Chapter 7.

Even if your incomes are similar, you still may not qualify for Chapter 7 as a couple. This is because the income amounts are based on household size, and the income maximum for two people is not twice that of one person.

(To learn more about income qualification for Chapter 7 bankruptcy, see the articles in The Means Test and Other Eligibility Issues topic.)

The Costs of Filing One vs. Two Bankruptcies

If you and your spouse file one bankruptcy, the overall cost will be lower than if you file two separate bankruptcies after you divorce. The filing fees for a Chapter 7 bankruptcy are currently $306. For a Chapter 13, the fees are $281.  You'll also have to pay a modest fee to get credit counseling. However, the real savings comes if you plan to hire an attorney. Paying an attorney to file one joint bankruptcy will be considerably cheaper than if each of you hire separate lawyers and filing separate bankruptcies.

If you decide to file jointly before divorcing, inform any potential attorney of your plans. The attorney may have a conflict of interest in representing you both in the bankruptcy.

Can You Protect More Property if You File for Bankruptcy Jointly or Separately? 

If you file for Chapter 7 bankruptcy, federal and state laws allow you to "exempt" some property.  If your property is exempt, you get to keep it. Some states allow married couples filing a joint bankruptcy to double the allowed exemptions. So, for example, if the exemption for your home is $75,000, married couples filing a joint bankruptcy could protect $150,000 in their home. If your state allows for doubling, and this would help you protect more property, it might make sense to file for bankruptcy before divorcing.

However, if you can't double exemption amounts in your state, and not all of your property will be protected if you file a joint bankruptcy, you might be able to protect more property by dividing up your property through the divorce, and then filing separate bankruptcies. 

Check your state's exemption laws to determine how much property you can protect if you file alone or with your spouse. (To learn more about exemptions andfind your state's exemption amounts see our Bankruptcy Exemptions area.) 

If you are in the middle of a divorce and then file for bankruptcy, the automatic stay will stop the process of dividing property until after the banruptcy is over.

Should You Get Rid of Debts Prior to Divorce?

If you and your spouse get rid of debts prior to filing for divorce, you will likely have to spend less time dividing debts in the divorce (because you'll have less debts to divide). This can help lower your costs of divorce. 

Keep in mind too, that if the divorce court orders your spouse to pay a particular debt, the creditor can still come after you for payment of the debt. Of course, if this happens you can always seek reimbursement from your spouse. But it might take time and money to get your ex-spouse to pay up.

by: , J.D.

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