Divorce and Bankruptcy

Unfortunately, one of the leading causes of personal bankruptcy is divorce.  This reflects the ugly reality that, after a separation, income remains the same but there are typically increased housing and living expenses.  Add to that the legal expense of the divorce itself and many people find themselves in a financial black hole following a difficult emotional crisis.

The good news is that bankruptcy can give you a fresh start and a higher degree of financial separation from a former spouse.

Chapter 7 Bankruptcy before Divorce

Assuming all other qualifications are met, a joint chapter 7 bankruptcy case can be filed by a married couple, even if they have separate residences and are planning a divorce.  This injects some much-needed foresight and planning into the process and allows both parties to unburden themselves of many types of debts common among couples — credit cards, medical bills, broken leases and contracts, and property that is too burdensome to retain.  This has the effect of greatly simplifying the divorce, as most debt-related issues will have been resolved through the bankruptcy.  Couples can also negotiate the marital dissolution with a higher degree of trust knowing that their mutual debts have been largely resolved in a cooperative manner.  Obviously, this scenario requires that the couple is on good enough terms to work together through the bankruptcy process.

Chapter 13 Bankruptcy before Divorce

On the other hand, committing to a three- to five-year joint chapter 13 bankruptcy payment plan is usually a bad idea for a couple on the brink of divorce.  Not only can the divorce process itself be delayed by the automatic stay, but other sticky problems emerge, not the least of which is the question of which spouse will be making the bankruptcy payments.  Not surprisingly, a divorce after a chapter 13 plan (which has been funded on the assumption that income and expenses would be stable) often causes the chapter 13 plan to fail for budget reasons.  Even if one of the spouses can afford the plan payment, the nonpaying spouse often wants to be “done” with the case before the plan term and may not trust that the paying spouse will actually complete the plan.  This has the net effect of increasing costs while the nonpaying spouse severs the case from the paying spouse’s case.  Complicated accounting issues also arise as the chapter 13 trustee tries to allocate payments among the couple’s now separate cases.

For these reasons, a marital breakup during a chapter 13 bankruptcy often leads to a conversion of the case to chapter 7 by one or both of the spouses.

Bankruptcy after Divorce

As previously mentioned, loss of the other spouse’s income often precipitates a bankruptcy after a divorce.  While the bankruptcy itself is typically straightforward (whether chapter 7 or chapter 13), the filer must be aware of the divorce decree and the effects of the bankruptcy on the non-filing ex-spouse.  Remember, the divorce decree only binds the married couple to its terms; creditors are unaffected.  Thus, it is possible that one spouse ends up owing debts that were legally allocated to the bankruptcy-filing spouse in the divorce decree.  This in turn can cause additional legal costs in the divorce case as the parties re-litigate property and debt issues.

Comments are closed.