How Does Filing for Divorce Affect Your Bankruptcy?
Bankruptcy and divorce unfortunately sometimes go hand in hand. Severe financial pressure in a marriage is one of the leading causes of divorce, and the breakdown of a marriage can have ruinous financial effects. Depending on your finances and the state of your relationship, bankruptcy and divorce proceedings can each significantly impact their respective outcomes.
Although their causes may coincide, bankruptcy and divorce should not be pursued at the same time. Aside from the additional stress placed on you, one case can cause delays in the other and increase the legal costs for both spouses. An experienced California bankruptcy lawyer can help you sort out these and other issues if you are contemplating both a divorce and bankruptcy.
A central part of any bankruptcy is the automatic stay that goes into effect upon filing. This puts a freeze on the debtor’s assets — or joint assets in the case of a married couple. Since the stay remains in effect until the bankruptcy case is over, it will delay division of the couple’s property in a divorce filed while the bankruptcy case is pending.
Filing for a Chapter 7 bankruptcy prior to divorce may be advantageous for you and your spouse since it can be completed in as little as three to six months. Because your dischargeable debts will be erased at the conclusion of the case, they will not be a factor in the division of marital property in the divorce. (Remember, debts as well as assets are divided.) If you get divorced first, and you and your spouse remain jointly responsible for certain debts, a separate bankruptcy for either of you will not relieve the other spouse of their debt share.
However, Chapter 7 eligibility requires passing a means test to see if your income is at or below the median income for your state. If your combined income is too high, you will have to file for bankruptcy under Chapter 13, which requires court approval of a three- to five-year plan for repaying unsecured debt. You and your spouse will have to cooperate in the plan’s completion. If you are going through a divorce, the plan delays the final division of marital property. It might be better to get divorced prior to filing bankruptcy if that would lower your respective income levels enough that each of you may qualify for Chapter 7.
Clearly, the intersection of bankruptcy and divorce is one fraught with dangers and uncertainties. Before making hasty decisions about whether to proceed with both and about which to file first, you should sit down with a qualified counsel who can help you determine the path that makes the most sense from a practical business perspective.
At the Law Offices of Michael Jay Berger in Beverly Hills, I have decades of experience guiding individuals and couples through Chapter 7 and Chapter 13 bankruptcies. Schedule a free initial consultation by calling 310-271-6223 or contact me online.