Bankruptcy and Divorce: Which Comes First?

If you contemplating bankruptcy and divorce, then timing is critical. This article only helps if neither one of you has filed for divorce or bankruptcy yet. If you are in a divorce then check out Part 1 of this article. If you already finished a divorce, then check out Part 2.

What Problems Could There Be?

The main problem is that a bankruptcy takes precedence over the divorce. In other words, you have to finish your bankruptcy before a divorce can be finished. So there is no real way to “do them at the same time.” Second, bankruptcy handles debts tied to a person’s name or social security number. Therefore, if you have community debts (in both names) then they will still exist in both names regardless if the divorce finishes before or after the bankruptcy. Finally, the US Bankruptcy Court treats income differently than a divorce.

Why File Bankruptcy First?

If you and your spouse are on good terms, then consider a bankruptcy before the divorce. By filing jointly, all debts will be addressed under one bankruptcy case. Joint credit cards, houses/mortgages, and assets exemptions will be increased by filing jointly. This is very good if you make all the money because it will increase the chance for a Chapter 7 or a low Chapter 13 payment plan. The bankruptcy will also eliminate contracts that neither one of you wants, like cars loans that cost too much or mortgages on houses that are completely underwater.

If you qualify for a Chapter 7 Bankruptcy, then you should finish in about 90 days. Therefore, you and your spouse can eliminate unsecured debt which takes away the fight over debt.

Warning, if you and your spouse file for a Chapter 13 Bankruptcy then you are both responsible for the repayment plan. You may also be prevented from dividing assets by sale.

After the bankruptcy is done, then divorce will proceed without a chance of delay by the Bankruptcy court.

Why Divorce First?

A divorce might make sense if there is a big difference in income. For example, if you make significantly less than your spouse then you could qualify for a Chapter 7 bankruptcy to get rid of debt in their name without a Chapter 13 payment plan.

Proper planning in a divorce may also move certain assets outside of the Trustee’s influence. For example, if one spouse takes a house in the divorce, a proper judgment with the proper transfer of title/mortgage can protect the ex-spouse from your creditors.

Finally, by divorcing first, it will allow for support considerations. For example, if you will owe a lot of support, then it will help to know that amount before the bankruptcy. Specifically, the support can affect how your bankruptcy will proceed. Nothing is worse than having a bankruptcy repayment plan based on income you do not have access to.