Six Reasons to File Bankruptcy Before the Divorce

A spousal tug-of-war over money. Divorce or bankruptcy?. Getty Images

It is an unfortunate fact of life that financial issues in a marriage often lead to divorce. If you seem to be headed for bankruptcy or divorce or both, does it make sense to file the bankruptcy or the divorce first? When the home situation has deteriorated to the point where the pressure is just too great, you'll probably be tempted to seek out a divorce attorney before a bankruptcy attorney. Is it that bankruptcy still suffers a stigma that divorce has overcome?

The bottom line is that divorce will rarely make the financial pressures go away. It's much more likely that you and your children will end up worse off. You might make things easier for yourself if you file a bankruptcy case first. Here are some valid reasons why you might want to consider eliminating the debt (and the financial pressure) before you file for divorce.  

1.  Filing a joint case will save you money.

If you’re still married when you file, you can file a bankruptcy case together. This is called a joint case. There will be one court filing fee, one set of documents and schedules, one meeting of creditors, and usually one attorney’s fee. Some attorney won’t charge more for a joint case than an individual case, but some will charge an extra fee to cover the extra work involved. It is almost never a full fee for the spouse.

2.  Filing bankruptcy can free you from any liability on joint debt.

If you file bankruptcy before your divorce, you will be relieved of any liability to pay that debt.

If you divorce first, a later bankruptcy might not do you any good. As a part of the divorce settlement, you may be forced to agree to remain responsible for some of that joint debt. You'll be agreeing to cover your spouse’s liability. Even if you file bankruptcy later, you will  discharge the debt as far as your creditor is concerned, but you cannot discharge that promise to cover your spouse’s liability.

For instance, you and your spouse owe $5,000 to Visa. In your divorce settlement, you agree to be responsible for the debt. Please understand that the divorce settlement is only an agreement between you and your ex. It does not eliminate your ex's liability to Visa, and Visa can still try to collect from her. What you've done is promise to pay it so that she won't have to. This is often called a "hold harmless" agreement. When you file bankruptcy you will discharge your liability to Visa. But you can't discharge your liability to your ex-spouse. You will either have to file pay the Visa debt or you'll have to reimburse your ex-spouse if she is forced to pay it. 

On the other hand, if you file bankruptcy before the divorce, you are no longer liable on the debt and cannot be forced to agree to pay it in a property settlement. Furthermore, if your spouse joins you in the bankruptcy filing, she, too, will be relieved of liability.  

3.  If your spouse files bankruptcy before or during the divorce case and you don’t, you can be stuck with all the debt.

Now, let’s look at a similar scenario, only it’s your spouse that’s filing bankruptcy. If your spouse files a bankruptcy before or during the divorce case, and you choose to not to file bankruptcy, you will likely be stuck with the debt.

That’s because your spouse used a bankruptcy case to eliminate her liability on your joint debts. She can’t be forced to accept liability for discharged debt in a property settlement. That leaves you with all the liability on all the joint debt.

4.  Filing jointly doubles exemption amounts.

When you file a bankruptcy case, you are allowed to keep some property with which to get a fresh start. We call those exemptions

Exemption amounts are usually limited or capped at a particular dollar amount. If you file a bankruptcy case with your spouse, in most states you and your spouse will each be able to claim a full set of exemptions, in effect doubling the exemptions for each type of property.

5.  Filing jointly can save time.

This a common tactic we see in divorce cases. One spouse will seek to gain some advantage by filing a bankruptcy case in the middle of the divorce action.

This will often cause a delay when the judge in the divorce case takes time to determine whether the divorce case can even proceed while the bankruptcy case is pending. In addition, the bankruptcy judge may take jurisdiction of any property settlements, which can delay both cases even further.  

In addition, filing a joint case will eliminate most if not all unsecured debt like credit cards, medical bills and personal loans, for both spouses. Eliminating debt before the divorce will smooth the process of negotiating debt and property divisions.

6.  Filing a joint bankruptcy can reduce stress.

Financial woes contribute to marriage discord. This is a fact. Reducing financial woes can reduce stress on the marriage. At the very least, this may make the divorce proceed with less strife. At best it can give the marriage a new lease on life, and may be a small price to pay for that peace. For more on emotions and bankruptcy visit:  

Surviving and Thriving After Bankruptcy: Dealing With Emotions, Part 1

Surviving and Thriving After Bankruptcy: Dealing With Emotions, Part 2

 

Updated by Carron Nicks November 2017