Five Considerations for Couples Considering Bankruptcy AND Divorce
It is an unfortunate truth that some couples facing financial hardship are also considering dissolving their marriage. Here are five things to consider if you are in this situation.
1. Joint debts are easier to clear up with a joint bankruptcy filing.
Married couples can file as a couple. This is known as a joint filing. This joint filing has the effect of discharging joint and individual debts for both spouses. Waiting to get divorced until after the bankruptcy means that only one bankruptcy must be filed. If you get divorced before filing for bankruptcy, the joint filing option is off the table.
2. High-income couples may want to ignore #1
If you and your spouse fail the Chapter 7 means test due to your combined incomes, then finalizing a divorce before filing for bankruptcy may help you both pass the Chapter 7 means test. If you don't have many assets, but do have a large amount of debt, then a Chapter 7 bankruptcy is the preferred method -- it eliminates your debts without a repayment plan.
3. If one spouse discharges a joint debt, then the other remains liable.
This is true regardless of when you file for bankruptcy. If only one person files, then the other remains liable for joint debts. Keep in mind that both people are liable for 100% of the joint debt. There is no 50-50 split on joint debts when it comes to liability.
4. You cannot discharge domestic obligations in bankruptcy
There's not much more to say here. You absolutely cannot discharge spousal or child support obligations in a bankruptcy. If you are waiting for your divorce to finalize before filing for bankruptcy to avoid your support obligations, then you are in for a rude awakening when your discharge is issued.
5. A bankruptcy judge can set aside marital settlement agreements.
If it appears that a marital settlement disposes of property to protect assets from creditors or defraud creditors, then a bankruptcy judge can and will set aside that agreement. The money you spent on attorneys to hammer out the agreement will have been wasted; the effort will have been wasted as well.
Quite simply, unless filing for bankruptcy after your divorce allows both spouses to pass the Chapter 7 means test, then 99% of the time, it is best to file a joint bankruptcy and then file for divorce.
For more complex issues related to family law and divorces, please consult with a qualified family law attorney.