Key Takeaways:
- When you file for bankruptcy in California, it freezes all financial matters. This includes the division of property and debt.
- If you declare bankruptcy during the divorce process, you can’t finalize your divorce until the process is complete.
- Divorce doesn’t automatically impact loans or other financial agreements.
- One party may attempt to assume shared debt with the intent to file for bankruptcy, but this can create new problems.
- If you declare bankruptcy, past creditors can go after your ex, or vice versa, as they are not bound by your divorce decree.
- If you default, it’s possible for your ex to come back at you if there’s a hold harmless clause.
- A married couple can file for bankruptcy together. Completing the bankruptcy before filing for divorce may simplify the divorce.
Debt has a way of getting ahead of you all too quickly. Credit cards, loans, medical bills, mortgages, they all add up. If you’re not careful, before long, you’re fighting just to keep your head above water. Divorce compounds all these issues, and the question of whether or not to file for bankruptcy during divorce often comes up.
When Can You File For Bankruptcy: During or After a Divorce?
Marriages often bear the brunt of financial problems, and filing for bankruptcy is often the best option. But that also impacts every facet of your life, including divorce.
When considering this move, one question that often comes up is timing.
- When should you file for bankruptcy?
- Does filing before divorce make the most sense?
- Should you wait until you have settled everything before taking this step?
- Can the two happen at the same time?
Bankruptcy Before Divorce
When you file for bankruptcy in California, it freezes all financial matters. Everything related to property, assets, debts, and the rest comes to a screeching halt. This includes the division of property.
In this case, the answer is clear, until you put the money issues to bed, you can’t finalize your divorce.
California is a community property state. The courts look at all assets acquired during a marriage as the joint property of both spouses. It also views debt the same way.
Until you get all of that sorted out, you have to hit pause on completing the divorce process.
Related Reading: What to Expect From Divorce Hearings
Bankruptcy After Divorce
One party may attempt to assume all, or at least a substantial portion, of the shared debt in a divorce, with the intention of filing for bankruptcy afterward. The hope is that this will eliminate unsecured obligations.
If you’re in a deep hole, this often looks like a way out. But it usually only causes new problems.
For instance, say you take on all the shared debt in the settlement and then file for bankruptcy. Creditors can still go after your ex.
Divorce doesn’t automatically impact loans or other financial agreements. Their name is on those documents, too, and in this scenario, they’re not bankrupt.
If creditors go after your ex, it may then be possible for your ex to come back at you if there’s a hold harmless clause. This provision states that one party will consider the other party blameless for collections on debts divided during property distribution.
Essentially, if you accept the debt, but the people you owe go after your ex, you may still face repercussions.
In a case like this, waiting to file for bankruptcy until after the divorce may backfire. After all the time and effort, it can still damage your credit and finances. And to top it all off, you may not accomplish much in the long run.
Related Reading: Are Divorce Records Public?
Types of Bankruptcy
Because this whole deal isn’t complicated enough, you have multiple types of bankruptcy to consider. Each fits different circumstances and has distinct consequences.
Chapter 7 is the most common type of bankruptcy. It’s what’s called liquidation bankruptcy. This means that whatever assets you have are converted into cash, which is then used to repay creditors.
People commonly use this to pay off credit cards, medical expenses, and other similar debts. You can claim exemptions under Chapter 7 and protect some assets through the process. Chapter 7 is a shorter proposition; you can often complete it in a few months.
Chapter 13 is the other type of bankruptcy commonly used by individuals. Unlike Chapter 7, this type lasts longer and usually takes 3 to 5 years to complete.
The reason for this is that you ultimately have to pay back all, or at least most, of your debts. Under Chapter 13, you keep your assets while reorganizing your debts and paying them off through a repayment plan.
There are other varieties of bankruptcy, but these two occur most often.
Related Reading: Credit Card Debt and Divorce
Joint Filing
A married couple can file for bankruptcy together. Completing the bankruptcy before filing for divorce may simplify the divorce.
Couples who file jointly, with a few exceptions, are each allowed a complete set of exemptions. Working together in this regard may protect a larger portion of your shared assets. It also often helps streamline the process of dividing shared assets and debts.
Divorce is a complicated business. Bankruptcy is also complex. Unfortunately, the two areas often overlap. When they do, things become twisted in a hurry. Going through either or both, it’s likely in your best interests to consult an experienced financial professional.
Related Reading: How Are Assets Split In A Divorce In California?
