Ordinarily, a couple with financial problems could simply file bankruptcy and get a financial fresh start. But a couple contemplating divorce should first consider how filing bankruptcy could affect their divorce and vice versa. The timing of filing bankruptcy and divorce affects different aspects and outcomes of each procedure.
Here are some ways bankruptcy and divorce can affect each other.
Division of Property
As soon as a bankruptcy petition is filed, an automatic stay goes into effect. Then the court-appointed bankruptcy trustee creates a bankruptcy estate for the property owned by bankruptcy filer. These two things stop the collection efforts of creditors and ensure that no property gets transferred. The bankruptcy court acts to stop creditors from reclaiming a debtor’s property before the bankruptcy is complete.
The divorce court has no authority to divide property being held in a bankruptcy estate. So, a division of property in the divorce goes on hold until the bankruptcy is completed. This could cause a delay in the divorce proceedings.
Allocation of Debts
One of the most time-consuming and costly aspects of a divorce proceeding is litigating which debts each spouse will be responsible for paying after the divorce is final. But, even with the best plan, the debt allocation could cause the couple problems in the future.
For example, just because one spouse is ordered to pay a certain debt, it does not eliminate the other spouse’s obligations to the creditor. This means if the assigned spouse fails to pay the debt, the creditor still holds the other spouse liable. Also, if one spouse ever needs to file bankruptcy later, they cannot discharge a debt they have been decreed to pay in the divorce agreement.
But, if a couple completes bankruptcy before the divorce, they could discharge most of their debts. This could help ease the messy process of debt allocation during their divorce.
Property Exemptions
Property exemptions are an important aspect of bankruptcy. Federal and state laws allow debtors to “exempt” a certain amount of assets from being included in the bankruptcy estate.
Alabama bankruptcy law allows married couples to double the allowed individual exemption amount. So, it could be beneficial for a couple to complete bankruptcy before filing for divorce so they could exempt more of their assets.
Bankruptcy Income Qualification
When a couple files for bankruptcy jointly, their combined incomes are used to determine which chapter of bankruptcy they can file. If their income is low enough, they can file for Chapter 7 bankruptcy. Under Chapter 7 bankruptcy, they could have their debts discharged within 4–6 months. If their income is too high, they could file for Chapter 13 bankruptcy. This would allow them to repay their debts over a 3–5 year period for a bankruptcy court restructured debt plan.
So, if a couple’s combined income is too large to qualify, they may want to wait until after the divorce and each file separate bankruptcy petitions.
Getting Help with Your Bankruptcy and Divorce
Each couple’s financial situation is unique. So, whether they should file for bankruptcy before their divorce or after differs. Without the proper knowledge of how bankruptcy and divorce affect each other, a couple could end up making timely and costly mistakes.
Are you and your spouse struggling financially and contemplating divorce? Contact us today for a free evaluation of your situation. Don’t act without the proper knowledge and cause even more stress. Our experienced bankruptcy attorneys will help you understand your best options and guide you through the process.