20
Aug

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The top reasons for filing bankruptcy are job loss, medical bills and divorce.  One of the top reasons for divorce is often money trouble.  As a result, it’s not uncommon for couples to decide to file bankruptcy right after they get divorced.  But if a couple’s financial situation is that dire, might it be a good plan to file bankruptcy together before getting divorced?

Things to Consider

Whether or not you decide to file before or after a divorce depends on 6 main things:

  • You need to determine what kind of bankruptcy you want to file, a Chapter 7 or Chapter 13.
  • State exemption laws: all property you own is declared either exempt or non-exempt during a bankruptcy.  Exempt property may be kept after the case has concluded.   Depending on where you live, you may get extra exemptions if you file jointly.
  • State laws concerning division of property during a divorce could be at odds with what property is exempt in a bankruptcy.  In other words, the items you fought to keep after your marriage ends could be in jeopardy once again in subsequent bankruptcy proceedings.
  • The cost for filing a joint bankruptcy is the same as filing an individual one.  This means you can save hundreds of dollars by filing together.
  • If you file together, both of your incomes are used to qualify you for a Chapter 7  – too much renders you ineligible.
  • Filing bankruptcy jointly implies that you can work together, something that may not be possible if your relationship is acrimonious.

Deciding on a Chapter 7 or a 13 Bankruptcy

A Chapter 7 bankruptcy takes a much shorter period of time, as little as 3 or 4 months.   A Chapter 13 typically lasts 3 to 5 years, so if you want to file for bankruptcy before divorce, a Chapter 7 may be the best way to go.

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Exemptions

There are two systems of exemptions in U.S. bankruptcy court, state and federal.  State law dictates which exemption system to use, or allows you to pick one or the other.  Exemptions are specific to the types of property being exempted, like homes or autos, rather than the dollar value of an item.  Homestead exemptions determine what part of the equity in your home is protected from creditors.  Some state homestead exemptions are quite generous, most notably Florida and Texas, which allow unlimited equity in your home after a bankruptcy.

In some states, filing bankruptcy jointly allows your to double the amount of exemptions.  If you are filing a joint bankruptcy, you may get to keep more property overall than if you had filed separately.

In a Chapter 7 bankruptcy, you will have to sell any property that is non-exempt.  In a Chapter 13 bankruptcy, you get to keep all non-exempt property.  But exemption still matters in a Chapter 13.  In your Chapter 13 repayment plan, you must pay your unsecured creditors an amount equal to your non-exempt property.  So the more you can exempt, the less you have to pay back (and the less time you spend in bankruptcy).

Income

Filing a Chapter 7 bankruptcy requires you to pass a Means Test.  The Means Test involves calculating whether or not you can afford to repay back all or a portion of your debt.  If your joint income is too high, you will not qualify for a joint Chapter 7 bankruptcy.    This is the case even if one spouse’s income is low enough to qualify individually for a Chapter 7.  The Means Test is based on household size and the limit for a household of two is not twice that of a single person household.   In this case, it might be better to wait until after a divorce to file or to file individually.

Property and Joint Debts

Divorce decrees divide up both property and debt.  Lawyers get paid by the hour.  Deciding which debts and property belong to which spouse can be both time consuming and costly in lawyer’s fees.  Why spend hundreds of dollars in legal fees determining division of debt and property when a bankruptcy could decide these matters for you?

In order to determine the best outcome from your bankruptcy and divorce, you must consider your state’s exemption limits to make sure that all the property you both want to keep after a divorce is protected from a bankruptcy.

When it comes to determining debt responsibilities, divorce decrees don’t absolve one spouse from a debt declared to be the other’s joint property – creditors don’t recognize divorce decrees on division of debt, no matter what lawyers tell you.   Filing a bankruptcy before you get divorced clears all unsecured debt obligations you may have, making it easier (and cheaper!) to get all debt division matters resolved.

Note: if you file for divorce at the same time as bankruptcy, your divorce may be put on hold because bankruptcy puts an automatic stay on property division.

Costs of Filing a Bankruptcy

The bankruptcy filing process has become much more complicated since the bankruptcy reform act of 2005.  The average cost of filing a Chapter 7 bankruptcy has doubled, averaging now around $1500.  However, a married couple may file jointly – two for the price of one.   You can also file jointly for a Chapter 13 bankruptcy – fees run between $2500 and $3000.   You don’t need to be living together in order to file jointly in either case.

There are costs other than court fees and paying your lawyer.  U.S. law requires you to attend pre- and post-bankruptcy counseling classes which run around $68 for single filer and $87 for a joint filer.   (Your lawyer’s fees will not cover these costs.)

Cooperation is Key

Filing bankruptcy is stressful, and so is divorce.  Doing both at the same time, or in rapid succession, is not for the faint of heart.  Filing a bankruptcy requires teamwork; there is quite a bit of paperwork to fill out together. If you’re not able to speak to each other with civility, filing bankruptcy jointly may be impossible.  When you both sign up for the required bankruptcy education by paying one joint fee, they may tell you that you have to attend the training together – can you stand that much more time together?


Posted in Finance