Bankruptcy and Divorce: Should You File Bankruptcy Before You Get Divorced?

Getting divorced is an emotional hardship. Often times, it is a financial hardship as well. In fact, financial trouble might have been the primary driving force behind the divorce.

As the parties begin to contemplate whether or not they will be filling for divorce and/or bankruptcy, it is important for them to consider prior to the divorce whether they should be filing as joint debtors or individual debtors if they are going to file bankruptcy. The parties need to understand there are crucial timing implications of the filing of the bankruptcy petition in connection with the divorce proceeding.

If both spouses are likely to file bankruptcy, the divorcing couple should consider the possibility of filing together. The bitterness behind the divorce might lead one or both spouses to not want to file a case together. However, if it makes financial sense to do so, the couple should swallow their pride and file together.

If the parties decide they would like to file a joint petition, they must do so while still married. Therefore, the parties must agree to delay the filing of a divorce. Some examples of why it would be advantageous to file bankruptcy as a married couple prior to filing for divorce, include, but are not limited, to:

• A joint case means only one filing fee
• A joint case results in one joint attorney fee, rather than two separate individual attorney fees
• Perhaps the couple can qualify as a chapter 7 under the means test using their joint household size, but if they filed separately, the spouses would not be eligible to file chapter 7 due to too much disposable income for each individual household size, per the means test figures.
• The couple can qualify jointly as a chapter 7 under the exception to the means test of being a majority non consumer debtor, but if they separate prior to the bankruptcy filing, one spouse might have majority consumer debts and be ineligible to file chapter 7 based on the means test or another reason.
• The couple has substantial joint debts and if only one spouse files, the non-filing spouse will continue to owe and be liable for payments of the debts that only the filing spouse discharged in bankruptcy. If a judge in a divorce case feels that the now debt free spouse filed to unfairly saddle the non-filing spouse with the parties joint debts, the judge can order that spouse to pay alimony or support to the non-filing spouse. If the filing spouse filed for a chapter 7, the non-filing spouse can successfully argue to the judge in the divorce case that the filing spouses discharge frees up money that can be paid to the non-filing spouse. Also, after the divorce has been finalized, the filing spouse could possibly be liable to the non-filing spouse due to an indemnification agreement in the divorce decree. In either scenario, a bankruptcy discharge cannot protect the filing spouse from the obligations set forth in a divorce decree and/or settlement agreement.

It is not recommended that any divorcing couple file a joint chapter 13 prior to a divorce. A chapter 13 is a minimum 36 months commitment, and since the couple would surely get divorced in the middle of the bankruptcy proceeding, this would result in too many competing interests among the spouses while the case is pending.

If after considering joint petition, one or both of the spouses decides to file as an individual, that spouse must now decide whether to file bankruptcy before or after the divorce. There is no set rule of thumb whether an individual bankruptcy filing should be filed before or after the divorce. If the couple has already moved into separate households- even if they are not yet divorced- the means test will only be calculated based on the debtors new household size, so the debtors eligibility to qualify under a chapter 7 will not be impacted by the filing date (as to the divorce).

Whether the debtor files bankruptcy before or after the divorce, the debtor has to make sure the divorce decree and complaint is in line with the bankruptcy papers. For instance, does the debtor state the same income and assets under oath in its bankruptcy petition as it does in its divorce affidavit?

Additionally, the debtor wants to make sure that any co-debts the debtor has with the either soon to be, or newly crowned, ex-spouse, are accounted for in the intended way in both the divorce and bankruptcy.

For example, lets use the scenario where the debtor and spouse own a mortgage together in which they owe $50,000 more than the house is worth, and only the debtor is planning on filing bankruptcy. The debtor wants to make sure that he is no longer liable in any way on this mortgage debt.

Regardless of when the debtor files bankruptcy, the debtor will not be liable to the mortgage company, as the debt will be discharged in bankruptcy. Conversely, the non-filing spouse will continue to be liable to the mortgage company, as her debts are not discharged in the husbands bankruptcy.

If the debtor files bankruptcy prior to divorce, he would want to structure his divorce decree if possible so that he is not liable as a support payment to the wife for her ongoing share of the mortgage debt. This is because his support payment to the wife is non dischargeable, even if his debt to the mortgage company is dischargeable.

If the debtor files bankruptcy after the divorce, he needs to know that if his divorce decree made him liable on the mortgage payment as support to the wife through indemnification, his bankruptcy will not get him out of his obligation to the wife. Therefore, in this scenario, it is imperative for the divorcing debtor to explain to his divorce attorney that he is contemplating bankruptcy and wants to structure an agreement without indemnification, if possible.

These are just some of the scenarios that can play out in a situation where a debtor is going through divorce and bankruptcy. Both areas of law are quite complicated, and this is why a divorcing debtor would be wise to seek experienced counsel in both areas prior to finalizing either a divorce or bankruptcy.

Eileen J. Shuman contributed to this blog. She is a family law attorney in Atlanta and a partner at Shuman & Shuman, P.C.. She can be reached at eileen@shumanfamilylaw.com.