Veronica Baxter interviewed Katherine K. Wagner, Esq. to create this Q & A on the basics of bankruptcy in the context of divorce.
VB: People often ask, should I file bankruptcy before, after, or while I’m getting divorced?
KW: It sounds like a cop-out but really, it depends upon the reason the couple feels the need to file bankruptcy. Simply put, if the couple needs to file jointly to discharge joint credit card debt, or surrender a car or home they can no longer afford, filing bankruptcy jointly before or during the divorce proceedings is likely best. Keep in mind that couples can only file a joint petition if they are legally married.
If parties in a dissolving marriage need to file bankruptcy individually due to individual debts, then after the divorce is probably a good time.
Any couple contemplating filing bankruptcy while getting divorced should keep in mind that the bankruptcy filing will stop or “stay” the divorce proceedings and delay entry of their divorce judgment.
VB: I know couples getting divorced want to know whether they should file jointly or individually. What do you think?
KW: Again, it depends upon why they are considering filing bankruptcy, and also, what sort of relationship they have with one another. If they can work together amicably on their bankruptcy filing, then a joint petition will be successful. There is no doubt that filing jointly is less onerous and less expensive.
Here are the common fees and costs.
(These vary by state and region.)
- Legal fee for an attorney
- Filing Fee to the Bankruptcy Court
- Cost to enroll in pre-filing Credit Counseling Course
- Cost to enroll in post-filing Debtor Education Course
Regardless of the costs, if the relationship is acrimonious, then filing individually despite the costs might be warranted if the individuals hope to have a successful filing and avoid further conflict with one another.
VB: Divorcing couples generally have two choices: Chapter 7 or Chapter 13 bankruptcy. Which would you suggest?
KW: First, I’d suggest they consult with an experienced bankruptcy attorney in their area who can tell them which type of bankruptcy would fit them best. But I can say that generally, whether the couple files under Chapter 7 or Chapter 13 depends upon why they need to file, and their goals.
If the couple has mostly unsecured debt, like credit cards or medical bills, and if they income-qualify to file Chapter 7, that might be best. If the couple’s main goal is to save their home from foreclosure or get back a car that was repossessed, a Chapter 13 plan may be best.
Chapter 7 Bankruptcy for Divorcing Couples
Chapter 7 bankruptcy is a 4-6 month process during which a couple must disclose all income, assets, expenses, and debts in their filing. At the conclusion, the couple receives a discharge of their unsecured debt – meaning, they are no longer personally liable for that debt. It is also possible to surrender a car or home that they can no longer afford and be discharged of the underlying loan or mortgage.
Chapter 13 Bankruptcy for Divorcing Couples
If the couple is contemplating bankruptcy because they are behind in paying their mortgage and one of them wants to retain the house after divorce, filing Chapter 13 allows that person to repay the mortgage arrears over the life of their Chapter 13 plan. Again, keep in mind that if one party files a Chapter 13 petition, this delays entry of the divorce judgment for that 3 or 5 year period.
A common situation arises when jointly, a couple’s income renders them ineligible to file under Chapter 7. If filing jointly they would have to file Chapter 13 and pay their creditors a portion of the debt they owe over a 3- or 5-year monthly payment plan. However, if that couple were to file after getting divorced, perhaps individually they would income-qualify to file Chapter 7. Something to consider if there is no house or car to be saved.
VB: What if only one party thinks she or she needs to file bankruptcy?
KW: If someone files a bankruptcy petition and their soon-to-be-ex does not, the non-filing spouse will remain liable for any joint debt – unless he or she decides to file bankruptcy individually at some later date.
Of course, if the relationship is acrimonious and no one cares if it continues to be so, perhaps the filing spouse does not have to consider the impact of the filing on their ex, but if a divorcing couple is hoping to remain amicable going forward, say, in the case where there are children they need to continue to co-parent, then working together to find the best bankruptcy solution for them both might be warranted.
VB: Thanks for your time Kathy. Any last thoughts?
KW: Yes – your readers should keep in mind that this Q & A is not intended to be legal advice, but rather, some general considerations for couples contemplating both divorce and bankruptcy. They should not make any decisions based on this article but should consult with an experienced bankruptcy attorney who can assess their particular situation and advise them accordingly.
