Divorce can be a difficult time for couples, as it involves not only emotional turmoil but also a lot of financial considerations. One option that some individuals consider during this time is filing for bankruptcy to alleviate their debt. This process involves separating finances, establishing separate households, and ensuring the well-being of any children involved.
Interestingly, the cost of divorce is one of the most common reasons why people file for bankruptcy. If you're in this situation, a Philadelphia bankruptcy attorney can help you understand the financial and legal implications of bankruptcy and divorce. By working with an attorney, you can determine whether bankruptcy is the right choice for you.
1) Should you file before or after divorce? How to determine which to file first.
One of the first questions that divorcing couples ask is whether they should file for bankruptcy before or after the divorce. The answer to this question depends on the joint assets and debts that the couple has, and what assets each party intends to keep after the divorce.
If the couple owns a home with equity and one of them intends to keep it, it is advisable to file for bankruptcy jointly before the divorce. However, if this is not the case, the couple may want to explore other debt-relief options.
It is important to note that only married couples can file for bankruptcy jointly. Therefore, if it is possible to collaborate on a joint filing at this stage of the relationship, it may be prudent to do so. All individual and joint non-priority debt will be discharged, and in some cases, income tax debt can also be discharged.
If the combined income of the couple is too high to file for Chapter 7 jointly, they may consider filing two separate Chapter 7 cases. However, this will entail twice the legal and court filing fees. Alternatively, the couple may file for a Chapter 13 case, which will tie them up for three to five years.
Filing Chapter 13 Bankruptcy and Divorce
If you're going through a divorce, filing for Chapter 13 bankruptcy may not be your first choice. But in some cases, it may be a smart financial decision for both parties to file jointly. Here are some reasons why:
- If your marital home is worth less than what you owe on your first mortgage and you have a second mortgage or a HELOC, filing for Chapter 13 can help. The second mortgage or HELOC can be "stripped off" as unsecured and discharged.
- If you own one or more cars that are worth less than the balance on the car loan, you can "cram down" the car loan to the current value and pay it off at prime plus 1-3% in your joint Chapter 13 case. The remaining balance of the loan is discharged as unsecured, and you own the car when you complete your plan.
- If you're behind on mortgage or car loan payments and facing foreclosure or repossession, filing for Chapter 13 can give you time to catch up on payments and avoid losing your home or car.
While the idea of dealing with your ex-spouse for another three to five years may not be appealing, filing jointly for Chapter 13 can provide financial relief and a fresh start for both parties.
2) Should we file bankruptcy jointly or separately?
If you're going through a divorce and considering filing for bankruptcy, you may be wondering whether to file jointly or separately. The answer to this question depends on the nature of your relationship. For most couples, filing jointly is the best option. However, not all couples can work together on a joint filing.Filing for bankruptcy jointly can be beneficial because it doubles your exemptions, which can prevent the trustee from seizing or selling your jointly-owned property. If you own a home and one of you plans to keep it after the divorce, you can apply for the homestead exemption and the wildcard exemption to exempt all equity from your bankruptcy estate. This will keep your home out of the reach of the trustee, who would otherwise sell it for the benefit of your creditors.
If one of you files for bankruptcy before the divorce and the other does not, the non-filing spouse will be responsible for all joint debt that is discharged. However, the non-filing spouse's divorce attorney can negotiate for partial or equal repayment of those debts in the property settlement agreement. Ultimately, the family law judge will decide how to assign the assets and responsibility for debts.
Before making a decision, you should also consider whether it's better to file for bankruptcy with or without your spouse. To make the right choice, it's essential to understand the benefits and challenges of each option.
3) Understanding the division of assets in a divorce and how that affects your bankruptcy.
If you're considering filing for bankruptcy after your divorce, it's important to understand how the division of assets in your property settlement agreement will impact your bankruptcy estate. You'll need to disclose all assets outlined in the agreement in your bankruptcy filing, and certain assets may be exempt from the bankruptcy estate depending on their equity value. For example, if you have significant equity in your marital home, you'll need to consider whether you can exempt it before filing for bankruptcy.
It's also important to note that any support payments you receive must be disclosed as income, while any support payments you make must be disclosed as an expense. Be sure to include these payments in your bankruptcy filing to ensure accuracy and transparency.
4) Does bankruptcy stop divorce proceedings?
So, you're going through a divorce and considering filing for bankruptcy? It's important to know that filing for bankruptcy after you've already filed for divorce but before the final judgment is entered can put your divorce proceedings on hold until your bankruptcy case is resolved. This also applies to any other legal proceedings, such as collection and foreclosure actions.
While it may seem like a good idea to file for bankruptcy during your divorce, it's generally not recommended. Filing for bankruptcy before or after your divorce can result in a smoother and less complicated process.
5) Who is responsible for the debt in a divorce?
Whether you and your spouse share responsibility for debt incurred during your marriage depends on where you live. If you reside in a community property state, both of you are liable for the debt. However, if you do not live in a community property state, your responsibility for the debt will be determined by the agreements you made with your creditors. Additionally, a family law judge may require one or both of you to pay off any individual debts that are deemed fair to be shared, such as a mortgage on a home where one party remains with the children after a divorce.
Check if you live in a community property state and understand your contractual obligations to avoid any legal or financial problems in the future.
6) Are divorce-related obligations dischargeable in bankruptcy?
When it comes to bankruptcy and divorce, it's important to understand which debts can be discharged and which cannot. For instance, any debt that is considered "nature of support" cannot be discharged. This includes payments that are intended to substitute for support payments, such as mortgage payments or other debt obligations.
However, general unsecured debt that was incurred as a result of the divorce can be discharged in bankruptcy. This means that both parties can potentially eliminate any debt that was not related to support payments.
It's crucial to consult with a bankruptcy attorney to determine which debts can be discharged and which cannot. By doing so, you can make informed decisions about your financial future and move forward with a fresh start.
7) Does bankruptcy help with child support issues?
Did you know that child support, spousal support, and alimony cannot be discharged in bankruptcy? This means that even if you file for bankruptcy, you will still be responsible for paying these obligations. However, there is a way to cure past-due support payments through Chapter 13 bankruptcy. By filing this type of bankruptcy, you can pay off your support obligations over three or five years, making it more affordable for you.
If you are going through a divorce and struggling with debt, bankruptcy may be a viable option for you and your soon-to-be ex-spouse. It's important to do your research and discuss your financial goals with each other to come up with a plan that works for both parties. Collaborating and agreeing on how to handle your financial situation can lead to a better outcome for everyone involved.
About the Author
Veronica Baxter is a legal assistant and blogger based in Philadelphia. She frequently works with David Offen, Esq., a busy Philadelphia bankruptcy lawyer.