Should I File For Bankruptcy Or Divorce First?

Goldberg Jones Divorce, Featured Posts, Finances, Spotlight Leave a Comment

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

The CliffsNotes version is that bankruptcy complicates divorce in any number of ways. 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? Or 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. 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.

Bankruptcy After Divorce

One party may try to take on all or at least a substantial part of the shared debt in 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 may look like a way out. But it often 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. Her name is on those documents, too, and she’s not bankrupt.

If creditors go after her, it may then be possible for her to come back at you if there’s a hold harmless clause. This is a provision that states one party will hold the other harmless 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 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.

Types of Bankruptcy

Because this idea 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 a 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: How the New Tax Plan Will Impact 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 professional.

Related Reading: Ex Agreed To Pay Off Shared Debt Then Declared Bankruptcy
Related Reading: How Is Child Support Calculated In California?
Related Reading: If I Don’t Have A Will, Would My Ex Get Everything?

Leave a Reply

Your email address will not be published. Required fields are marked *