Bankruptcy is the legal process by which the debt of the party filing for bankruptcy is discharged, thereby absolving a party of a portion of their debt. Unfortunately, the bankruptcy process is not as simple as it sounds, and it can be further complicated when the parties—or an individual—are in the middle of a divorce or considering a divorce.
As a result of this, family law clients often ask whether they should file for divorce or bankruptcy first. Unfortunately, there is no clear-cut answer, as every divorce and every bankruptcy filing is unique. However, there are a variety of factors one can consider when deciding this question:
- Income of the parties. If one party has significant debt, but the other party makes a substantial income, it will be difficult to qualify to file a joint Chapter 7 bankruptcy. This is because the court will have to consider the total household income when determining whether or not to grant the bankruptcy petition. In this case, it is likely more beneficial to file for divorce prior to filing bankruptcy so that the household income is not considered in the bankruptcy petition.
- Both parties have to agree to file bankruptcy. Filing for joint bankruptcy is not possible unless both spouses consent to the filing. One spouse cannot force the other to file, even during a divorce proceeding. However, the party who wants to file for bankruptcy may still be eligible to do so individually, but filing individually will not discharge the debts of the other party. Therefore, it may be advisable to file for bankruptcy before the divorce so that both parties’ debt may be discharge before the divorce proceedings begin.
- Look at how the debt has been distributed. In some instances, one of the parties may have substantial separate property and assets, possibly received through an inheritance or gift, or pre-marital property. In this situation, the party wanting to file for bankruptcy may want to do so individually, without including the party with substantial assets because these assets may prevent a bankruptcy from being discharged.
- Property of the Estate during a Divorce. After a bankruptcy petition is filed, all of the debtor’s property becomes property of the bankruptcy estate. This means that the property of the bankruptcy estate cannot be divided in any property settlement agreement during a divorce unless permission is received from the bankruptcy judge or if the bankruptcy is over. This can significantly delay any divorce proceeding.
Considering that there are a variety of factors that can be measured, it is very important that anyone with questions about bankruptcy during the divorce process be able to provide complete and accurate information about their assets and liabilities, so that one’s attorney will be better able to assess your situation.
As a result, one should consult with an experienced family law attorney who can then work with a bankruptcy attorney to determine what the best course of action will be given the specific facts of a case.
OG Post by: Megan E. Smith