What You Need to Know About Bankruptcy and Divorce

Filing for divorce is a painful process in and of itself. But what happens when you need to file for bankruptcy around the same time?

For those wondering if it is even possible to file for bankruptcy before the official end of your marriage, the answer may surprise you. Many have been led to believe that bankruptcy is a long, arduous process. However, the reality is that bankruptcy can be filed in the span of just a few months, which makes it quick and easy to process before your divorce is finalized.

If you have been wondering how to go about handling your bankruptcy in the midst of a divorce, we are going to cover the basics: what to file, when to file it, and what it means for your divorce settlement. For an in-depth look at the link between bankruptcy and divorce, keep reading.

What to File

Perhaps your divorce is spurring the need to file for bankruptcy. If so, many experts recommend filing for Chapter 7 bankruptcy, as opposed to the more common Chapter 13 bankruptcy. This type of filing usually grants you a discharge after a few months. (In other words, you are released from the personal liability for certain debts, and you are not obligated to repay any of these released debts.)

Meanwhile, a Chapter 13 filing could take up to five years to complete. When a divorce is pending, you would be better off having a discharge completed before your settlement.

Qualifying for a Chapter 7 bankruptcy depends on the results of your means test, which is a formula designed to see if you quality for it. You can complete an online version of this test here.

Debts that are included in your divorce settlement may be considered non-dischargeable. In other words, you are legally obligated to repay these debts, even if you file for Chapter 7 bankruptcy.

Whether or not you qualify for Chapter 7, it is not necessarily the best choice if:

  • You have a lot of non-dischargeable debts (e.g., child support, alimony obligations, student loans, or luxury debts) or you owe income taxes from the past three years.
  • You have been proven guilty of fraud, larceny, embezzlement, or driving under the influence.
  • You would have to give up rights to property you were hoping to keep.
  • It will not be worth your while to discharge your debts.

To more accurately assess whether filing for Chapter 7 bankruptcy is the wisest financial decision for you, consult with a bankruptcy attorney about your individual financial situation.

When to File

It may be wise to file for your Chapter 7 bankruptcy before the settlement of your divorce. The primary reason for this arrangement is to absolve you of the liability to repay the debt. If your bankruptcy has been filed and discharged before the finalization of your divorce, your responsibility to pay for your joint debt has been erased.

Because you are legally obligated to repay non-dischargeable debts, most individuals prefer to file before the finalization of their divorce to release them from the legal responsibility to repay that debt.

The other benefit of filing for bankruptcy before the dissolution of your marriage is the ability to file jointly for Chapter 7. This move could save you money on filing for an attorney. Check with professionals in your state to see what exemptions you qualify for. Filing jointly may also give you more exemptions, which can be a large benefit to both you and your spouse.

However, if your spouse prefers not to file jointly, you can still opt to file individually. Filing together wipes joint debt from your marriage, leaving neither of you liable for making repayments (which is usually the preferred choice). Keep in mind that you will not be discharged from any debts that are included in your divorce settlement—if you wait until after your divorce is finalized to file.

If you and your spouse earn high incomes and only maintain a single household, you may not pass the means test. Due to the income restrictions on the test, it may be necessary to wait until you and your spouse maintain separate households—in order to qualify.

Filing for Chapter 7 before filing for your divorce can come with significant benefits for both of you, particularly if you plan to file jointly. Have a detailed conversation with your spouse about the possibility of briefly putting your divorce on hold to file for bankruptcy. If you do, it could simplify the settlement process.

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Shawn Leamon, MBA, CDFA is author of Divorce and Your Money: The No-Nonsense Guide and host of the Divorce and Your Money Show on iTunes. Learn more at  www.divorceandyourmoney.com.

Shawn Leamon, MBA, CDFA

Dallas, Texas

Shawn C. H. Leamon is Managing Partner of LaGrande Global, a firm that helps successful families manage large financial transitions like divorce, inheritance and selling a business.

He earned his Bachelor of Arts from Dartmouth College, double majoring in Economics and Philosophy, and his Masters in Business Administration at Spain’s IE Business School.

Before founding LaGrande Global, Shawn helped manage $1.1 billion in client assets at Bernstein Global Wealth Management. He also worked as a credit research analyst at J.P. Morgan. He is a Certified Divorce Financial Analyst, and he has been an advisor to numerous high-stakes divorce cases.

Shawn is the author of two well-received finance books: Managing Private Wealth: Principles, and Divorce and Your Money: The No-Nonsense Guide, both published in 2016.

In his spare time, Shawn is an ultra-endurance athlete and has competed in events as long as 24 hours. He is an Eagle Scout and a member of the Alumni Board of Greenhill School.