Do I file for divorce or Chapter 7 bankruptcy first?

Do I file for divorce or Chapter 7 bankruptcy first?

Recently on our divorce forum a user asked, “My husband has left me and is threatening divorce. We have also talked about filing for Chapter 7 bankruptcy. I am wondering whether it makes sense to file for divorce or bankruptcy first and what we need to consider before making this decision?”

Chapter 7 Bankruptcy and divorce what do I need to consider? 

The first thing to understand is that bankruptcy and divorce cannot be completed simultaneously. In fact, if you do file at the same time the bankruptcy could delay the divorce, specifically the distribution of your assets and the settlement of your liabilities until the bankruptcy is completed. With this in mind, you need to consider your options and determine whether you should file divorce or bankruptcy first.

Option 1: Filing for Chapter 7 bankruptcy first

Many spouses will benefit from filing bankruptcy prior to the divorce. If you file for bankruptcy first the court will consider all the debts jointly, which means all of your debts which are not exempt (i.e. medical bills, unsecured credit card debts and unsecured person loans) may be eliminated together.

Additionally, there are state and federal bankruptcy exemptions which can be used to protect certain assets. Filing Chapter 7 allows the courts to liquidate certain nonexempt debts. Married couples, however, are given higher bankruptcy exemptions for certain assets. With this in mind, if you file for bankruptcy first you may be able to better protect certain assets.

What’s the downside of filing for bankruptcy first? Some couples may have an income which is too high to quality for Chapter 7 bankruptcy. If this is the case, you and your spouse may be forced to file Chapter 13 bankruptcy. Unfortunately, the Chapter 13 bankruptcy repayment plan can take 3 to 5 years to complete, thus preventing the courts from dividing your assets until the plan is done.

Option 2: File for Divorce First

The number one reason to file for divorce before filing for bankruptcy is if your income level is too high to qualify for Chapter 7 as a married couple. As mentioned above, if you or your spouse’s income is too high you will have to file Chapter 13 bankruptcy.

Filing for divorce first, however, may allow you or your spouse (or both of you) to lower your incomes below the median income level for your state and file Chapter 7 bankruptcy.

Another reason you may choose to file for divorce prior to bankruptcy is to protect certain assets. For example, instead of having a creditor repossess a home or car, that asset may legally be transferred to your spouse. Before choosing this option, however, you need to discuss your case with a lawyer and make sure you understand how to properly transfer the title or mortgage.

Bottom line:

Whether to file for bankruptcy or divorce first should only be done after reviewing all of your options, the pros and cons of either decision, and discussing everything with your bankruptcy lawyer.

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