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Considering Divorce and Bankruptcy? What You Need to Understand

One of the single biggest issues for most married couples is money. It's the source of many fights and the fuel for animosity and stress, especially if you are struggling to make ends meet or are financially overextended. Unfortunately, these money problems often lead married couples to consider divorce. If you and your spouse are preparing to divorce, you should discuss your financial resolutions first. In fact, you may find that filing bankruptcy could be in your best interest. Here's a look at what you need to know about your impending divorce and the potential for bankruptcy relief.

Can't You File After the Divorce?

You might wonder why you should even be thinking about bankruptcy right now when you can just get through the divorce and then file bankruptcy yourself if you need to. The truth is that there may be some advantages to filing for bankruptcy now, before you and your spouse divorce.

When you file for bankruptcy together, you get double the exemptions in your bankruptcy case, allowing you to potentially protect assets you wouldn't otherwise get to keep. Additionally, with the income limit factors, you might have an easier time passing a means test as a married couple than you would individually. Additionally, if your spouse files for bankruptcy by themselves and you don't, you might find yourself legally responsible for all of the debts that you two held together.

Should You File Chapter 7 or 13?

The bankruptcy chapter you file can make a big difference in the process. When you're preparing for a divorce, you may want to consider filing Chapter 7 because it is discharged quickly and then you can go your separate ways. With a Chapter 13 bankruptcy, the process can take several years with the repayment plan. However, sometimes Chapter 13 is your best option.

For example, if you are upside-down on your home mortgage and have a second mortgage in place already, Chapter 13 might allow you to discharge the second mortgage and only have to worry about the primary debt. The same applies if you own vehicles and owe far more on them than they are worth. You can often negotiate to pay market value at a lower interest rate as part of your bankruptcy when you file Chapter 13.

Does Asset Division Affect Your Bankruptcy?

Another important reason to think about filing for bankruptcy before you file for your divorce is that you will face asset division as part of your divorce filing. This can leave you, as an individual filer, with fewer assets to liquidate for debt offsets. 

When you file before you file for divorce, you'll be able to incorporate any potential assets that you own as a married couple, allowing you to moderate your debts more effectively. This will also simplify the asset division process when you do file for divorce because there will be fewer assets to negotiate.

What Happens to Your Remaining Debts in the Divorce?

There are certain debts that you can't discharge in bankruptcy. Things like student loans, some tax debts, child support or alimony, and legal debts are not eligible to be discharged in bankruptcy. As a result, you may find that you go into your divorce with certain debts still looming.

Anything that's exclusively the responsibility of one spouse, such as student loans in which only one of you is named on them, will typically be court-ordered to be the responsibility of the named party. The same typically applies to child support and alimony. However, any remaining debts that are in both of your names, or that can legally be considered joint responsibilities, will typically be mandated as joint responsibility in the divorce decree as well. Your former spouse will be legally obligated to help you by paying half of that debt.

If you're struggling financially, talk with a bankruptcy lawyer today about the possibility of filing for bankruptcy before you and your spouse get divorced. Services like Havner Law Firm can help you determine if it's in your best interest to file now or to finalize the divorce first.


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