How Bankruptcy Affects Divorce

Dealing with not one but two major legal events in the same period of time can be a challenge, and not just due to the stressful nature of each of them. These two actions can affect each other since they both involve financial issues. Read on to learn more about dealing with the effects that a bankruptcy might have on your divorce settlement

Debts and Divorce

Lest you focus too much on the emotional aspects of divorce, it's worth considering just how many financial issues are involved in a typical legal parting. Debt that was once joint has to be made separate and if you live in a community property state you may be looking at the responsibility of dealing with your spouse's debts as well as your own. If you can pay off any joint debt you could virtually eliminate the need for it being a contentious issue, but if your financial situation is so bad that a bankruptcy is being contemplated then that solution probably won't help.

File Bankruptcy First

In certain instances, particularly if you both have a great deal of credit card debt or other unsecured debts, you might want to file for a chapter 7 bankruptcy before you file for divorce. This form of bankruptcy takes a few months to be complete, but you can deal with issues like support and property using a legal separation agreement during that time period.

Doing this could allow you to stay married long enough to nearly totally remove the debt issue from your divorce. To be clear, it would take a joint bankruptcy to do the whole job, so both of you would need to file together. Another bonus of filing bankruptcy jointly is the ability, in certain states, to double your personal property and homestead exemptions. This means keeping more property which is always a good thing, even if that property later turns into another contentious issue for you.

File Later

On the other hand, if it's your partner that is riddled with personal debt and you have no part of it, you might want to go ahead with the divorce or just let your spouse declare bankruptcy alone whenever they wish. Just be aware that jointly-held property (like a home) could be subject to seizure by the bankruptcy courts, regardless of who is filing.

The potential for the property to be seized depends on how much equity or value it holds and what the homestead exemption allows. If you have property at risk and could be awarded that property in a divorce, speak to an attorney for advice. In some instances, the bankruptcy courts can still seize property that was divided up in a divorce to help pay creditors.

Your Income

Another issue that affects bankruptcy and divorce is income. Your income and your spouses are considered together even if the bankruptcy is joint, and there are some limits on income in each state. If you make too much as a couple, you might want to wait until after your divorce when your income drops to file, if that is the case.

To say that these issues together is complicated would be an understatement. You will need to consult attorneys to learn which issue to address first and how to do so.