Pros and Cons of Filing a Chapter 7 Bankruptcy before Divorce
Posted on Thursday, February 1st, 2018 at 10:05 am
Divorce can be an unfortunate situation for a married couple in endless ways and will almost always have a detrimental effect on the parties’ financial situations. Frequently, one or both individuals seeks relief from United States Bankruptcy Court for a Chapter 7 case after the conclusion of the divorce. Although the immediate stressors of the marriage and divorce lessen, the financial strain can be worse. By considering a joint Chapter 7 bankruptcy prior to the divorce, a couple can receive unexpected benefits that offer at least some small relief to an otherwise difficult situation.
The following pros and cons should be considered by individuals who find themselves facing financial hardships and potential divorce.
Cost and Time
With most attorneys, the cost of filing a bankruptcy is the same for an individual or married couple. By filing the bankruptcy jointly, a divorcing couple cuts the cost in half as well as the time and preparation involved. There will be one filing fee, one fee for attorney work time, one set of documents, one court hearing, etc.
Cooperation. Filing a joint Chapter 7 will require the divorcing couple to work together to ensure their attorney has all the necessary documents and will require that they attend at least a couple meetings and court hearings together.
Probably one of greatest benefits to filing a Chapter 7 case prior to divorcing is that all debt liability is wiped away for both Debtors on all applicable debts. Should the parties file after the conclusion of the divorce, the property settlement will typically trump a subsequent bankruptcy and could leave one of the individuals liable for the ex-spouse’s debts. For example, if the family court orders the husband to pay the wife’s credit card debt, he cannot avoid doing so by filing a Chapter 7 Bankruptcy after the fact. If the couple files a joint bankruptcy prior to the divorce, neither party has any such debt.
If one spouse chooses to file an individual bankruptcy prior to the divorce, the other spouse could be left liable for all the debt. This could be financially devastating and ultimately push that spouse to a bankruptcy anyway.
Filing a joint bankruptcy prior to divorce allows a couple to double the exemption limits. In a bankruptcy, a couple can have a certain amount of value in assets. Equity in a car or house can sometimes exceed the allowed exemption. By filing jointly and using a double exemption, the couple can better protect their assets through the bankruptcy.
The couple will ultimately still have to agree on the division of any such equity in their subsequent property settlement!
Filing a bankruptcy prior to the divorce will protect each individual’s divorce attorney from being listed as a creditor subject to discharge in a subsequent case. This is a pro for both attorneys and Debtors. Divorce attorneys are given the reassurance that they will be compensated for the work they do and Debtors will benefit from an attorney who is more willing to offer lower retainer fees and payment plans.
In applicable situations, family law attorneys would be wise to refer their clients to a local bankruptcy attorney for a consultation prior to the initiation of the divorce proceedings. Taking such action can offer tremendous benefits to the couple, can simplify the divorce case, and can provide protection for future legal work on the divorce case.
In contrast, individuals considering a Chapter 13 bankruptcy should seek to finalize their divorce first. A Chapter 13 typically lasts 3 – 5 years and is based heavily on household income, expenses, and secured debts that need to be paid. Couples who are in a Chapter 13 together prior to divorcing typically incur additional attorney fees to bifurcate the original case and put them in their own Chapter 13 cases.