Bankruptcy and Divorce

Getting divorced is an emotional hardship. Often times, it is a financial hardship as well. In fact, financial trouble might have been the primary driving force behind the divorce.

As the parties begin to contemplate whether or not they will be filling for divorce and/or bankruptcy, it is important for them to consider prior to the divorce whether they should be filing as joint debtors or individual debtors if they are going to file bankruptcy. The parties need to understand there are crucial timing implications of the filing of the bankruptcy petition in connection with the divorce proceeding.

If both spouses are likely to file bankruptcy, the divorcing couple should consider the possibility of filing together. The bitterness behind the divorce might lead one or both spouses to not want to file a case together. However, if it makes financial sense to do so, the couple should swallow their pride and file together.

If the parties decide they would like to file a joint petition, they must do so while still married. Therefore, the parties must agree to delay the filing of a divorce. Some examples of why it would be advantageous to file bankruptcy as a married couple prior to filing for divorce, include, but are not limited, to:

  • A joint case means only one filing fee
  • A joint case results in one joint attorney fee, rather than two separate individual attorney fees

Perhaps the couple can qualify as a chapter 7 under the Means Test using their joint household size, but if they filed separately, the spouses would not be eligible to file chapter 7 due to too much disposable income for each individual household size, per the means test figures.

The couple can qualify jointly as a Chapter 7 under the exception to the Means Test of being a majority non consumer debtor, but if they separate prior to the bankruptcy filing, one spouse might have majority consumer debts and be ineligible to file chapter 7 based on the means test or another reason.

The couple has substantial joint debts and if only one spouse files, the non-filing spouse will continue to owe and be liable for payments of the debts that only the filing spouse discharged in bankruptcy. If a judge in a divorce case feels that the now debt free spouse filed to unfairly saddle the non-filing spouse with the parties joint debts, the judge can order that spouse to pay alimony or support to the non-filing spouse. If the filing spouse filed for a chapter 7, the non-filing spouse can successfully argue to the judge in the divorce case that the filing spouse discharge frees up money that can be paid to the non-filing spouse. Also, after the divorce has been finalized, the filing spouse could possibly be liable to the non-filing spouse due to an indemnification agreement in the divorce decree. In either scenario, a bankruptcy discharge cannot protect the filing spouse from the obligations set forth in a divorce decree and/or settlement agreement.

It is not recommended that any divorcing couple file a joint Chapter 13 prior to a divorce. A chapter 13 is a minimum 36 months commitment, and since the couple would surely get divorced in the middle of the bankruptcy proceeding, this would result in too many competing interests among the spouses while the case is pending.