How Bankruptcy Affects Divorce
Divorce and bankruptcy are among the most personally and practically challenging processes life can throw at you; when you have to deal with both at once, it can be completely overwhelming. Understanding how bankruptcy affects divorce is crucial if you’re in this situation.
Here, we untangle the details of these kinds of scenarios, and help you understand what to expect if you’re dealing with the prospect of both divorce and bankruptcy.
How Bankruptcy Affects Divorce Proceedings
Bankruptcy’s impact on divorce proceedings depends on the type of bankruptcy filed, the timing of it, and the financial situation of both spouses.
The first consideration here is the automatic stay, which has the potential to complicate the division of assets during divorce proceedings. When you file for bankruptcy, your nonexempt property becomes part of your bankruptcy estate. When the automatic stay takes effect, creditors (including the other party to divorce proceedings) cannot legally attempt to repossess any part of the bankruptcy estate.
If you’re filing for Chapter 7 bankruptcy, the process is usually relatively quick. However, Chapter 13’s repayment plan can take as long as five years to complete, and the automatic stay remains in place for the duration of this period.
Marital Debt and Divorce
One of the most crucial considerations when it comes to bankruptcy and divorce is the handling of joint debts. In a divorce, debts are usually divided between the spouses. If one spouse’s bankruptcy discharges these debts, creditors may still pursue the other spouse for payment.
Many clients come to us as married couples who are going through divorce and considering bankruptcy for their large amounts of shared debt. In these situations, we often recommend pausing divorce proceedings and completing the bankruptcy process before ending their marriage. This is often a more straightforward and effective way of dealing with unmanageable debt.
Again, though, this depends on the type of bankruptcy under consideration. If you want to file for Chapter 13, you may not want to remain married for the duration of the three- to five-year repayment plan. With Chapter 7, this is less of an issue.
Should You File for Bankruptcy Jointly or Individually?
Many of our clients ask whether it’s preferable to file for bankruptcy individually or jointly if they’re in the process of divorcing but technically are still married. As is the case with many aspects of divorce and bankruptcy, this depends on individual circumstances.
Filing jointly can be beneficial because it allows the spouses to discharge debts together, potentially saving on legal fees and streamlining the process. It also ensures that all joint debts are addressed in one bankruptcy filing, preventing creditors from pursuing one spouse after the other’s debts are discharged.
However, filing individually might make sense if one spouse has significantly more debt or if you and your spouse plan to keep some debts separate. It can also allow you and your spouse to pursue different types of bankruptcy (e.g., you could file for Chapter 7 and your spouse could file for Chapter 13) based on your respective income and financial needs.
Chapter 7 vs. Chapter 13
There are two main types of bankruptcy that consumers generally file for: Chapter 7 and Chapter 13. The right choice for you will mainly boil down to your financial circumstances. However, there are also important differences between the two in the context of marital separation.
Chapter 7 bankruptcy addresses your outstanding debts by liquidating your nonexempt assets and using the proceeds to pay off your creditors. So, if you hold assets jointly with your spouse (such as your primary place of residence), Chapter 7 bankruptcy can have significant consequences when it comes to the separation of assets during divorce.
Chapter 13 bankruptcy, on the other hand, requires you to submit a repayment plan based on your regular earnings, to be completed over the course of three to five years. However, while it doesn’t require the sale of your assets, your bankruptcy trustee will take into account the assets you have when determining how much you can afford to pay in monthly installments. So, divorce proceedings can cause complications here too, as it may not be immediately clear which assets you personally own and which are jointly held by you and your spouse.
Can Bankruptcy Stop a Divorce?
Bankruptcy won’t directly place any roadblocks in the way of you and your spouse if you want to file for divorce. However, as noted above, the automatic stay does interfere with the division of marital assets. Depending on your circumstances, it may be more convenient to wait until after the automatic stay is no longer in effect before you begin divorce proceedings.
As you can see, the best course of action in cases like these depends on many factors, particularly your financial situation. If you want a more detailed rundown of how this might all unfold for you in practice, you should visit us for a free initial consultation.
Alimony and Child Support Post-Bankruptcy
You should note that bankruptcy does not affect alimony and child support obligations. If you’re already paying one or both of these and you decide to file for bankruptcy, you’ll still have to pay the same amount.
You should also consider how bankruptcy might impact your ability to relocate with your children after your divorce. Many divorcing parents choose to move to another city to get a fresh start, but this could be a lot more difficult if you lose your assets or you need to make monthly Chapter 13 repayments. Additionally, relocating may negatively affect your position if you’re fighting for shared custody, as a court may view it as causing excessive disruption to the lives of your children.
Our firm has a lot of experience when it comes to difficult family law cases. Don’t hesitate to book a free consultation with us if you want to know more about how to handle your own situation.
Frequently Asked Questions (FAQs)
How does bankruptcy affect the division of retirement accounts during divorce?
Bankruptcy typically doesn’t impact the division of retirement accounts, as most qualified retirement plans are protected from creditors in bankruptcy.
Can my spouse’s debts fall on me if they file for bankruptcy?
Yes. If you and your spouse have joint debts, creditors may pursue you for these debts if your spouse’s obligations are discharged through bankruptcy.
Will bankruptcy stop me from receiving alimony or child support?
No, alimony and child support are considered priority debts and cannot be discharged in bankruptcy.
Should I consult a bankruptcy attorney before filing for divorce?
Yes, consulting a bankruptcy attorney can help you understand how bankruptcy will impact your divorce and protect your financial interests.
A Massachusetts Bankruptcy Attorney Who Will Fight for Your Rights
The idea of dealing with both divorce and bankruptcy at the same time might be an intimidating one. However, even if it seems scary, it may be the quickest way for you to deal with your problems and build the future you want. An experienced Massachusetts bankruptcy attorney will be able to help you navigate this process as effectively and painlessly as possible.
Contact us today to schedule a free initial consultation about your case. We’ll provide the advice you need to hear, not just the advice you want to hear.
