Bankruptcy and Divorce:
Answers to Your Questions

Financial and personal calamity often go hand in hand. After all, money woes are one of the leading causes of divorce. And divorce, in turn, is one of the leading causes of bankruptcy.

In these less-than-ideal circumstances, a little planning and education can help you prepare for what's ahead.

Which Type of Bankruptcy Should You File?

There are two types of bankruptcy that can be filed by individuals and married couples: chapter 7, and chapter 13.

Chapter 7

In a chapter 7 bankruptcy, your assets are sold to repay your creditors. Some assets - like certain types of real estate - are considered exempt, which protects them from liquidation. Following a successful chapter 7, your debts - with a few exceptions - are fully discharged, and get a fresh financial start. In order to qualify for chapter 7, your income must be below a certain threshold. This amount varies from state to state, and if your income is above this threshold, your chapter 7 filing may convert to a chapter 13.

Chapter 13

When filing for chapter 13 bankruptcy, you set up a 3-to-5-year repayment plan, which must be approved by the court, to pay off your creditors. Unlike chapter 7, your debts do not discharge until the repayment plan is complete. You do not have to liquidate your assets, and you get to keep your personal property. With chapter 13, it's important that you abide by the agreement and payment schedule. If you fail to do this, the court might dismiss your bankruptcy case.

Should You File Jointly or Separately?

Whether you're filing chapter 7 or chapter 13, you'll need to decide how you want to file: jointly with your spouse, or separately as individuals.

Filing Jointly

If you and your spouse are on good enough terms, you may want to consider filing jointly. You'll save on attorney and filing fees since you'll only be filing once. Another advantage to filing jointly is that in certain situations, you and your spouse can take double exemptions on property that you own together. The greater the exemptions, the lower the amount you're required to pay back to your creditors.

Filing Individually

In some circumstances, it may be better to file as an individual. If your combined income puts you above the chapter 7 threshold, you may wish to wait until the assets are divided in the divorce and then file on your own. You may also wish to file as an individual if you and your spouse are on less-than-friendly terms. If you think your spouse may be uncooperative, filing on your own is likely the better way to go.

Should You File For Bankruptcy Before, During, or After Divorce?

Filing for bankruptcy puts a freeze on your assets, which will leave them inaccessible to the court hearing the divorce case. This may prevent the court from dividing the assets, which may delay the case.

When possible, it's typically better to file for bankruptcy before starting your divorce proceedings. Filing prior to your divorce:

• Allows you and your spouse to file jointly, saving on filing fees
  
• Provides a clear financial picture heading into the divorce
  
• Resolves financial problems, which may lead to a more amicable divorce

If you're planning on filing for chapter 7 jointly with your spouse, remember that your combined income will be used to determine your eligibility. If it's above the threshold, you may want to hold off until after the divorce and file on your own. Also, if you're already under a chapter 13 bankruptcy repayment plan, filing for divorce before the plan ends means the plan must either be canceled or split into two separate plans for you and your spouse.

For help with your bankruptcy needs, contact Brace W. Luquire Attorney at Law.