When the Timing of Bankruptcy and Divorce Filing Matters

If circumstances have led you to contemplate both divorce and bankruptcy, you may be wondering if filing one before the other could have a positive impact on these two negative situations. The answer is yes, timing does matter, so read below for more information about the benefits and pitfalls of filing bankruptcy before, or after, divorce.

Debt and Divorce Settlements

Who pays what debt is often a major issue in divorce proceedings, but with a chapter 7 discharge, nearly all marital debt can be eliminated, and with it goes a large chunk of divisiveness. If you and your spouse share a large amount of unsecured debts, like credit card and loan debt, waiting until your chapter 7 bankruptcy is final to file for divorce may make debt division a lot simpler.

A word of warning about secure debts, however. Secure debts carry the potential for loss of property, since the creditor has the right to take back the "security," which could be your vehicle or your home. Discuss with your bankruptcy attorney how property loss could affect a future divorce settlement before declaring bankruptcy.

Double Exemptions

Some states give married couples who file chapter 7 bankruptcy jointly a double property exemption, which could help you both hang on to more property for your future. While some unsecured property could be subject to surrender under some circumstances, real estate and automobiles have an automatic exempted amount, which varies by state. Once you are divorced, any property you get in the settlement could be lost with bankruptcy if the property value exceed the exemption amount.

The Means Test May Mean Divorcing First and Bankruptcy Later

The means test is meant to prevent high-earning people from declaring bankruptcy. If you earn more than your state's median income, you may be barred from filing bankruptcy. You must include your spouse's income in the calculation, even if you are filing singly. If you and your spouse's income disqualifies you from filing bankruptcy, waiting to file after your divorce, with a potentially lower income, could mean you qualify to file for chapter 7 bankruptcy.

Chapter 7 or Chapter 13

If you are planning to file for a chapter 13 bankruptcy, you should be aware that this form of bankruptcy is actually more of a debt reorganization plan, and can take from two to five years to be complete. Since this repayment plan is based on your debt, you may want to complete your divorce first so that the debt division is complete. If you want to be finished with your bankruptcy quickly, a chapter 7 can be accomplished in a matter of a few months. You can compare the relative merits of chapter 7 and chapter 13 here.

Your individual financial situation will dictate your choices on which legal measure you take first. This complicated matter deserves the attention of a both a family lawyer and a bankruptcy attorney.