Bankruptcy Before Divorce Can Be a Smart Move

During tough economic times, many people are seeking ways to eliminate or at least get their debt under control. Bankruptcy is one means of doing so. Chapter 7 bankruptcy discharges (eliminates) most or all of the filer’s debt. It is most appropriate for people with low incomes and few assets. A Chapter 13 bankruptcy consolidates debts and sets out a payment schedule over several years, allowing the filer to keep some larger assets such as their home.

During a divorce, a couple’s assets and debts are divided. In fact, the spouses can decide who will keep which assets, and the amount each spouse will pay, and a family court will generally approve the agreement. But while the agreement may be binding between the spouses, it is not binding on their creditors. Both spouses are still responsible for the debt. If the spouse that agreed to pay the debt does not, the other spouse is still responsible.

Filing for bankruptcy before a divorce is one way to counter this. A joint bankruptcy filing with one’s soon to be ex-spouse is ideal. It allows the parties to discharge a significant amount of credit card and other consumer debt, eliminating the extra work in dividing that debt during the divorce. It also leaves more money to pay for alimony and child support. Moreover, filing jointly before the divorce prevents one spouse from filing later and leaving the other spouse responsible for all of the debt.

Waiting to file for bankruptcy until the divorce is pending merely compounds the already difficult divorce issues. A bankruptcy court will stay the divorce proceedings and the family court must wait until the bankruptcy issues are resolved before finishing the property division portion of the divorce. However, the stay does not stop the family court from ordering child support or alimony.

If you and your spouse can work together, filing bankruptcy jointly before filing for divorce can alleviate many financial issues down the road. Doing so will simplify the divorce proceedings and protect both parties from a later bankruptcy filing by the other. If you are considering a divorce and have significant debt, consult an experienced divorce attorney to discuss your options and the best financial strategy for your situation.