Divorce and bankruptcy may go together for a number of reasons. Both are about getting a fresh start; existing debt is important in both; and, both divorce and bankruptcy can lead to changes in cash flow and disposable income.
If you are both overwhelmed by debt and potentially ending your marriage, which should you pursue first, divorce or bankruptcy? The answer depends on your unique circumstances, but making the right choice could end up saving you thousands in the long run.
Eligibility, exemptions and debts chief considerations
Generally, consumers either pursue Chapter 7 or Chapter 13 bankruptcy. Chapter 7 bankruptcy involves a discharge of debt that only typically takes a few months. Chapter 7 is sometimes also called “liquidation,” because in some Chapter 7 cases, filers must give up assets whose value exceeds bankruptcy exemption amounts; nonexempt assets are sold to partially repay creditors before debts are discharged.
A Chapter 13 case is very different. In Chapter 13 bankruptcy, a repayment plan that spans a three to five year term is filed with the court. Under the terms of this plan, debts are consolidated and payments are often lowered. At the end of the term, most types of remaining debts are discharged completely, meaning filers often pay just pennies on the dollar to eliminate most unsecured debts.
Both Chapter 13 and Chapter 7 have eligibility criteria. The amount of income you can earn and still retain eligibility for Chapter 7 is determined by your household size, and you may only file for joint bankruptcy when you are married. The more people you have in your household, the higher your earnings can be. After getting divorced, you may no longer qualify for Chapter 7 because the size of your household has been reduced.
Chapter 7 bankruptcy exemptions are another consideration. Bankruptcy exemptions are generally doubled for a married couple in Connecticut compared to a single filer. This can allow you to structure your bankruptcy case in a way that lets you retain more assets than you would be able to if you waited until after divorce to file.
Finally, there are debts to consider. Both spouses are responsible for the debts incurred during the marriage. A divorce settlement or judgment can assign responsibility for paying all or part of various debts to one spouse or the other.
However, a divorce settlement is a legally binding agreement between the former spouses, not between creditors and the spouses. After divorce, if one spouse files for bankruptcy and creditors may therefore no longer collect on debts that he or she was supposed to pay pursuant to the divorce settlement, they may go after the other spouse. If your spouse is likely to file for bankruptcy after the divorce, you may need to take special care in crafting the divorce settlement or consider filing for bankruptcy jointly prior to the divorce.
It is worth noting that bankruptcy does not discharge a party’s responsibility to pay alimony or child support.
Ask an experienced divorce and bankruptcy lawyer which should come first
Before you pursue divorce or bankruptcy, you should consult an attorney, preferably one with experience in both areas. Talk to a divorce and bankruptcy lawyer to find out whether holding off on your divorce for just a few more months could save you thousands in bankruptcy court.
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