BANKRUPTCY AND DIVORCE

Going through a divorce is stressful enough but often debt goes along with it. Couples frequently must decide which party is going to assume debt or sometimes debt is divided among the parties. Furthermore, when a couple splits, the household goes from a two-income household to single income. This divide makes keeping up with the bills that much harder. You shouldn’t have to go through divorce only to come out with a mountain of debt, which you must figure out how to handle it all. This is why a large percentage of divorcing couples end up in bankruptcy court. But, when is the best time to file bankruptcy, if heading into divorce court? Let’s look at all the possibilities.

Filing Bankruptcy Before Filing Divorce

Assuming you have not yet filed for divorce, this may be the best time to file bankruptcy. You can file on your own, or if you and your spouse are amicable enough to file together, then even better. Filing on your own will get rid of all the debt. You can go into the divorce court free of debt, however, if the divorce court mandates that you must pay any part of the debt as part of a domestic support order (DSO), then your bankruptcy might not help you. In chapter 7 bankruptcy, all DSOs are non-dischargeable. In chapter 13 bankruptcy, you can pay off any DSOs through the chapter 13 plan and any remaining unpaid debt at the end of your case will be discharged.

If you are fortunate enough to file a joint case, then all the debt would be discharged and there would be no need for any debt related DSOs. So, if you file on your own prior to going into a divorce, you might still end up owing some debt, if it is court ordered that you are required to pay unless you have filed a joint case, which will discharge all the debt for both parties.

Filing Bankruptcy After You Filed for Divorce but Before Your Divorce is Finalized

Filing any bankruptcy, whether it’s chapter 7 or chapter 13, creates an Automatic Stay (Stay). The Stay is a court order from the bankruptcy court that states all legal proceedings from wherever they are must stop upon the filing of a bankruptcy case. This would include divorce court. If you file a bankruptcy case while in divorce, you must notify the court that you filed. The divorce proceedings will be stopped until the Stay is lifted.

This can cause delays in your divorce case because there’s relatively no time limit as to when your bankruptcy case might end. For chapter 7 cases, it can take about 4 to 6 months on average but could be longer if there are assets that are owned by the parties, which a chapter 7 bankruptcy trustee might be looking to liquidate. If you file a chapter 13, the plan payment period is 3 to 5 years. However, you can typically get the divorce case moving again after a few months. 

In chapter 7 bankruptcy, you have a bankruptcy trustee administering your case. The trustee will be looking for assets that are owned by the parties. Since your divorce is not yet final, any assets you and your spouse own come into play for the trustee. You must be very careful to list all assets owned by both parties, so the trustee does not surprise you by finding an asset to liquidate, which you agreed to allow your spouse to have. This may include any home, car or other property of significant value. It can be risky filing a case while in the middle of a divorce. Make sure you consult with an experienced bankruptcy attorney before filing any case. 

Filing Bankruptcy After Your Divorce Is Over

You’ve finalized your divorce and your divorce decree says your now former spouse owes all the debt, or you split the debt equally, right? Even though the divorce decree dictates how the debt will be split, in Arizona, as a community property state, you still owe all the debt. Community property laws state that if the debt was incurred during the marriage, both parties owe the debt equally. This means creditors can come looking for you to pay no matter what the divorce states. Simply put, creditors don’t care about your divorce decree. So, you have a mountain of debt to get rid of. This might be a perfect time to file bankruptcy.

You can discharge all of that debt and get a fresh start. However, there are still pitfalls. For example, if your former spouse owes you anything, such as a marital equalization payment, that payment may not be protected in bankruptcy. You must be made aware of these pitfalls before filing bankruptcy. You should hire an experienced chapter 7 or chapter 13 lawyer before filing bankruptcy. Call me today at 623-777-4760 or go to www.gaudiosilaw.com to schedule your free consultation so we can discuss your case and take a look at your divorce situation before you file bankruptcy.