Many divorcees cite financial problems as the pivotal issue that leads to divorce. Similarly, many who file for bankruptcy point to their divorce as the major financial setback that led to their bankruptcy. With these two legal issues frequently going hand in hand, it is common to see folks who file for divorce also file for bankruptcy. However, how you file for bankruptcy amidst your divorce can significantly impact your overall financial well-being. Filing for bankruptcy with your spouse before divorce may benefit some while waiting to file alone after divorce will work out better for others. Your unique position will determine what kind of bankruptcy is best for you and if it is better to file alone or with your soon-to-be ex-spouse.
Below, we will explore some of your options.
Option #1: File a joint Chapter 7 bankruptcy before divorce.
Filing bankruptcy with your spouse before divorce will save you and your former spouse money on attorney and court fees. Because you are liable for debts incurred during the marriage—even if you did not incur the debt yourself—taking care of your debt issues before exiting the marriage can make sense. Chapter 7 bankruptcy will let you discharge some or all of your marital debt, giving you a clean financial slate before you exit the marriage. It can also make dividing assets (and debts) more straightforward during the divorce. It is also possible that you will be able to protect more property using bankruptcy exemptions when you file Chapter 7 together.
However, filing Chapter 7 before divorce can be difficult if you cannot work well with your spouse. Bankruptcy requires a lot of paperwork, patience, and teamwork. If a joint bankruptcy would lead to more stress than it is worth, you may want to consider filing after your divorce. Filing for bankruptcy will also permit you to enter the automatic stay period, which stalls all court proceedings. The automatic stay is excellent if you want to stall a foreclosure or wage garnishment, but it is not so great if you are in the middle of a divorce. This is another reason you should file for bankruptcy before or after divorce, but not during.
Option #2: File an individual Chapter 7 bankruptcy after divorce.
If you and your spouse are not on decent enough terms to file Chapter 7 jointly, it is possible to file after divorce. Especially if you are escaping a difficult situation with your spouse, getting the marriage behind you as quickly as possible is likely in your best interest. Because bankruptcy can stall other court proceedings, you will want to ensure your divorce is finalized before filing Chapter 7 as an individual.
It may also be in your favor to file Chapter 7 individually after the divorce if you can only file Chapter 7 with your individual income as a separate household. Your spouse's income could disqualify you from eligibility for Chapter 7, and divorcing them can reduce your household income enough to ensure your eligibility. Filing as an individual will also allow you to use more bankruptcy exemptions to protect your personal property instead of jointly owned marital property.
However, waiting until after the divorce to file bankruptcy individually can become complicated when you consider debts you and your ex-spouse are jointly responsible for. If one spouse files bankruptcy post-divorce, the spouse who does not file can still be liable for the joint debt even if the debts are discharged during the bankruptcy. This can create a very complicated legal situation and lead to more time in court with your ex-spouse.
Option #3: File a joint Chapter 13 bankruptcy before divorce.
Chapter 13 bankruptcy cases are generally more complex, time-consuming, and expensive than Chapter 7 bankruptcy cases. The biggest thing to note about filing a joint Chapter 13 bankruptcy case is that it takes 3-5 years for a Chapter 13 bankruptcy case to be completed. This is due to the payment plan you and your spouse will set up to repay your debts. Filing for divorce while in the middle of a court-ordered Chapter 13 repayment plan can be a convoluted legal headache. So, if you are on the brink of divorce, filing Chapter 13 jointly with your spouse may not be the best plan.
That being said, if you and your spouse are amenable and can work together for 3-5 years on a Chapter 13 repayment plan, there are some significant benefits to filing Chapter 13 with your spouse. Bankruptcy can help you tackle some or all of your marital debt. Chapter 13 could also allow you both to walk away from jointly-owned property that neither of you want.
Option #4: File an individual Chapter 13 bankruptcy before divorce.
Filing Chapter 13 bankruptcy alone before or during divorce is not impossible, but it can unnecessarily complicate an already stressful time. Not only will it stall your divorce proceedings, but you will also have to include your spouse's income and expenses in your bankruptcy paperwork. This can set you up for an unrealistic repayment plan that does not accommodate your circumstances after separation. You also cannot sell any assets or incur further debts during Chapter 13 bankruptcy, which can be difficult, if not impossible, while you are going through a divorce.
Option #5: File an individual Chapter 13 bankruptcy after your divorce.
Filing for Chapter 13 bankruptcy after your divorce is finalized will make the most sense in most situations. This way, you will not need to work with your ex as you make decisions about your financial future. You also will not have to include their income or expenses in your bankruptcy paperwork, giving the court a more accurate picture of your financial situation. Chapter 13 will also enable you to eliminate any legal responsibility for shared debts or debts incurred due to the divorce.
If you are considering bankruptcy and are either going through a divorce or plan to divorce,
Veitengruber Law
can help. We understand NJ bankruptcy laws and can help you make the best decisions to give yourself a fresh start.