Six Reasons to File Bankruptcy Before the Divorce

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

It is unfortunate that divorce often seems to follow financial pressures in a marriage. Most people would understandably think that obtaining the divorce first is the way to go. But often, there are valid reasons to consider bankruptcy before the divorce is filed. Here are some things to think about.

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 before a bankruptcy is filed, often the bankruptcy will do you little good. You may be forced to agree to be responsible for some of that joint debt as a part of a divorce settlement. In effect, what you’re agreeing to do is 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 and $5,000 to Mastercard. You decide to divorce. You “split” the debts and agree to pay the Visa while she agrees to pay the Mastercard. If you file bankruptcy after you’ve entered into this agreement, you will discharge your debt as to the Visa. That means that Visa will not come back against you for that Visa balance.

But, your spouse is still liable to Visa even though you agreed to pay the debt. You are still required under the property settlement agreement to cover her liability on the Visa debt.

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.   

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.

When spouses file joint cases, they can each apply the exemption amount, in effect doubling the exemptions for each type of property.

5.  Filing jointly can save time.

In 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 stops to assess the situation 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