Can You File For Bankruptcy During Divorce?

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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.

But is it a good idea?

Should You File For Bankruptcy During or After a Divorce?

Marriages feel the brunt of these problems, and often filing for bankruptcy offers the best option available. But that also impacts every facet of your life, including divorce.

When considering this move, one question that pops up frequently is the timing.

  • When should you file bankruptcy?
  • Does filing before divorce make the most sense?
  • Should you wait until you settle everything to take 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 come to a screeching halt. This includes the division of property.

So 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 try to take on all or at least a substantial part of the shared debt in a divorce, planning to file for bankruptcy after. The hope is that this will get rid of unsecured obligations. If you’re in a deep hole, this often looks like a way out. But it often usually only causes new problems.

For instance, say you take on all the shared debt in the settlement 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 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 is a provision that states one party will consider the other blameless from collections on debts divided during property distribution.

Essentially, if you accept the debt, but the people you owe go after your ex, you may face repercussions.

In a case like this, waiting to file bankruptcy until after 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: How Is Child Support Calculated In California?

Types of Bankruptcy

Because this whole deal isn’t complicated enough, you have multiple types of bankruptcy to consider. Each fits different sets of circumstances, and each has its own distinct set of 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 common for individuals. Unlike Chapter 7, this type lasts longer and usually takes between three and five years.

The reason for this is because you ultimately have to pay back all, or at least most, of your debts. Under Chapter 13, you keep your assets, but you reorganize your debts and pay 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

It is possible for a married couple to file for bankruptcy together. Completing the bankruptcy process before filing for divorce may also simplify things on that side.

Couples who file jointly, with a few exceptions, are each allowed a full 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 complicated. Unfortunately, the two areas often meet up and 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.


From The Radio

Our founding partner, Rick Jones, regularly appears on the Danny Bonaduce and Sarah Morning Show to answer family law questions from listeners. On a recent show, a caller asked exactly this.

CALLER QUESTION:

“I recently got divorced, about a month ago. When they were deciding his child support, my ex got a reduction — a pretty significant deduction — because he was taking on the debt of the marriage. The minute the ink was dry he declared bankruptcy so he no longer has the debt and he doesn’t have to pay the child support.  Is there anything I can do about that?”

RICKS’S ANSWER

Rick: “Yeah, you actually have a recourse. The concept of fairness actually occasionally kicks-in in the world of law, and this is one of those circumstances. Where, in that divorce decree he was ordered to pay that debt.

“So what that does… that doesn’t change the relationship he had, or that you had with the creditor, that’s one of the concerns, that arguably, she’s still on the hook for some of this debt. But what it does do is it creates a financial obligation, a relationship between the two of you.

“So there’s a clause in your decree that’s called a “hold harmless clause,” which means, if you have to pay anything he was supposed to pay, you can bring it back to court.

In addition to that though, because he was supposed to pay this, something happened about her child support being somehow connected.  Which is rare I might add by the way. It does give her recourse to say, ‘hey, let’s adjust child support.’”

Danny: “What about his bankruptcy?

Rick: “Well, somebody’s entitled to a bankruptcy. He can get rid of that obligation, that’s between him and the creditor.

Danny: “But not between him and her?

Rick: “Think about this as a triangle. The courts didn’t change the relationship that either of them had with the creditor. Traded a financial relationship between the two of them. He cut off, legally, that relationship he had with the creditors, so now that relationship only exists between her and the creditor.”

Danny: “So it still exists, even though he…? Very cool, I did not know that. Thanks.

Related ReadingHow Are Assets Split In A Divorce In California?

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