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Bankruptcy & Equitable Division

Bankruptcy and divorce often go hand in hand, as one of the major causes of divorce is financial difficulty during the marriage. Couples may seek to file bankruptcy prior to or during divorce in order to liquidate joint debts or file for bankruptcy post-divorce due to their post-divorce financial situation. Whether it is advisable for you to file jointly with your spouse or individually post-divorce depends on your motivations for filing for bankruptcy and your desired outcome.

Generally, there are two types of personal bankruptcy that an individual (or couple) may seek pursuant to the United States Bankruptcy Code: Chapter 13 bankruptcy and Chapter 7 bankruptcy. If a family (or individual) earns more than the state median income, they are generally not eligible for a complete liquidation under Chapter 7 and must file a Chapter 13 bankruptcy plan. A Chapter 13 bankruptcy requires that a debtor or joint debtors make bi-weekly payments to a trustee for three to five years to repay creditors to the best of their ability. A Chapter 7 bankruptcy does not require this reorganization of debt, and most of the couple’s, or individual’s, existing debts will be discharged.

If both spouses determine that it would be in their financial interest to file for bankruptcy, the couple should consider filing jointly. If both spouses decide to file a joint petition, they must do so while still married. Thus, a decision to file for bankruptcy jointly would delay the filing for divorce. Although this may seem gravely disadvantageous to those who desire to be divorced, there are several advantages to filing bankruptcy jointly which may outweigh the disadvantage of remaining married throughout the duration of the bankruptcy process. Some advantages include:

  • A joint case means only one filing fee
  • A joint case results in one joint attorney fee, rather than two separate individual attorney fees
  • Perhaps the couple can qualify as a chapter 7 under the means test using their joint household size, but if they filed separately, the spouses would not be eligible to file chapter 7 due to too much disposable income for each individual household size, per the means test figures.
  • The couple can qualify jointly as a chapter 7 under the exception to the means test of being a majority non consumer debtor, but if they separate prior to the bankruptcy filing, one spouse might have majority consumer debts and be ineligible to file chapter 7 based on the means test or another reason.
  • The couple has substantial joint debts and if only one spouse files, the non-filing spouse will continue to owe and be liable for payments of the debts that only the filing spouse discharged in bankruptcy. If a judge in a divorce case feels that the now debt free spouse filed to unfairly saddle the non-filing spouse with the parties joint debts, the judge can order that spouse to pay alimony or support to the non-filing spouse. If the filing spouse filed for a chapter 7, the non-filing spouse can successfully argue to the judge in the divorce case that the filing spouses discharge frees up money that can be paid to the non-filing spouse. Also, after the divorce has been finalized, the filing spouse could possibly be liable to the non-filing spouse due to an indemnification agreement in the divorce decree. In either scenario, a bankruptcy discharge cannot protect the filing spouse from the obligations set forth in a divorce decree and/or settlement agreement.

Although it is generally not advisable for a couple to file a joint Chapter 13 bankruptcy prior to a divorce, as Chapter 13 proceedings may endure for 36 months or more, a Chapter 13 bankruptcy plan may be advisable for an individual filer – post divorce.

If one spouse determines the he or she would like to initiate a bankruptcy action individually, whether it be a Chapter 7 or Chapter 13, that spouse must decide whether he or she would like to pursue the bankruptcy prior to or after the divorce. There is no set rule regarding when an individual spouse (or ex-spouse) should file for bankruptcy. Thus, the decision whether to file pre-divorce or post-divorce is an individual decision that the spouse must make, taking into consideration advice of counsel as well as the individual’s personal and financial circumstances.

However, one consideration that should be taken into account by those who seek to file for bankruptcy individually is the impact that the Final Order and Decree of Divorce may have on the division of any joint debts accumulated by both spouses during the marriage. For example, Husband and Wife are jointly liable for a mortgage on which they owe $150,000 more than the home is worth. Husband files for bankruptcy individually prior to the divorce, and is thus no longer liable to the mortgage company. Wife remains liable to the mortgage company as her debts are not discharged in Husband’s bankruptcy. However, as a part of the couple’s Final Order and Decree of Divorce, Husband is required to make monthly support payments to Wife to enable Wife to remain in the marital home. Husband would be required to make these payments to Wife, because support payments are not dischargeable in bankruptcy, even though Husband is able to discharge the mortgage debt as to the mortgage company. See 11 U.S.C. § 101(14A).

Thus, if a spouse seeks to file bankruptcy prior to a divorce, that spouse should structure his or her divorce settlement agreement in such a way that does not result in the practical reacquisition of the debt discharged in bankruptcy. Additionally, if a spouse seeks to file for bankruptcy post-divorce he or she should be aware that if ordered to pay a joint debt as a form of support, that spouse will not be able to discharge his or her court ordered obligation to the former spouse. Id. However, if ordered to pay a joint debt as a form of property division, a spouse may be able to discharge this obligation in a Chapter 13 bankruptcy. See 11 U.S.C. § 1328(a)(2).

Bankruptcy and divorce are both complex areas of the law, involving several rules of law, and even more expectations to those rules, it is essential to speak with both a qualified divorce attorney and a qualified bankruptcy attorney if you are considering filing for bankruptcy prior to, during or after your divorce case. Obtaining the counsel of qualified attorneys in both areas will ensure that you make informed decisions and obtain desirable results.