Benefit of Settling Your Joint Property Before Filing Bankruptcy

There can be a benefit to settling joint property before filing bankruptcy when a couple is separated or divorcing.  It is not unusual for a divorcing spouse to discover a marriage partner is filing for bankruptcy during separation when faced with child support or alimony. When one spouse decides to file bankruptcy because of excessive debt, there are ramifications for the other spouse even if he or she does not file for a joint property bankruptcy. All joint property can be affected even if the couple is in the process of ending the marriage.

Separating or Divorcing Spouses Treated as Married

When a couple is separated or in the process of getting a divorce that is not final, and one spouse files for bankruptcy, the court will treat the couple as married. When just one spouse decides to file bankruptcy while a divorce is in process, the other spouse is subject to the state and federal laws as to what joint property is exempt or not exempt. Joint assets may be used to settle debts even if one of the spouses is legally debt free. This could deprive a spouse of assets that he or she would have owned as part of the divorce settlement.

Filing a bankruptcy before a divorce rather than after can actually preserve assets. For example, because a house is an exempt asset, each spouse can preserve the home’s equity in their joint names. After the divorce the house can then be sold.                                                        

Bankruptcy Can Simplify Divorce Settlement

Filing for bankruptcy before divorce can simplify the divorce process itself also. By discharging debts and assigning asset ownership before divorce proceedings, the divorce proceedings can avoid being long and drawn out due to property division. The bankruptcy court will have already settled contentious issues that could delay a divorce.  A couple can also save legal fees.

Make Sure Attorney Has All Information

A situation where a divorce and a bankruptcy are involved can be complex. An attorney should be consulted and given documentation of all assets and debts and who legally owns both. The attorney will then use that documentation to determine the most advantageous legal course to pursue. Since marital assets will clearly be part of the bankruptcy process it is important to establish clear ownership of assets and liabilities. In addition, the court must decide which of the assets are exempt from liquidation.