One of the leading causes for bankruptcy is a divorce (another is large medical costs). Divorce is expensive both in legal fees and in splitting one household into two. It comes as no surprise then that a common question that divorcing parties have is whether to file for bankruptcy and if so, when they should do it.
The ideal is for the couple to discharge their debts and then file for divorce: filing together is better than filing separately. First of all, if you file together, you only have to pay the legal fees and court costs for one bankruptcy instead of both of you paying for separate bankruptcies.
When you file for dissolution of marriage, there will be no need to argue over how to split the debts. The only debts that should remain are student loans and sometimes non-dischargeable tax debts. This makes the property settlement simpler and cheaper.
This approach is only recommended, though, if you are able to get along well enough to go through the bankruptcy process together. This of course requires the couple to be able to communicate about finances, which is often a cause for divorce in the first place.
One possible drawback: if you want your lawyer to represent the two of you in a bankruptcy and you want that same lawyer to handle the divorce, the lawyer cannot do so unless it will be a an uncontested divorce or your spouse gives written informed consent to the representation. A lawyer cannot a party whose interests are hostile to a former client.
Filing during divorce can be done, but only recommended if filing jointly: If a bankruptcy case is pending involving the divorcing couple, the divorce court must be informed of the pending bankruptcy. Because of the automatic stay in bankruptcy, the court will need to get permission from the bankruptcy court to do the property division which might delay the process, but won’t stop it either. As with filing prior to divorce, this requires communication between the parties. I don’t recommend filing solely during the divorce though. If one party files and the other does not, the non-filing party may be able to get the property division offset to account for the increase in debt.
Imagine a typical American couple divorcing. Perhaps they have some investments into 401(k) or other retirement accounts. That money is community property and would normally be split evenly between the parties. Suppose also that the couple has several thousand dollars in credit card debt and medical bills. If one party files for bankruptcy and the other does not, the non-filing party could seek a deviation from the normal property settlement because they have just been saddled with 100% of the debt. That is how it works when more than one party is responsible for a debt. A married couple is jointly liable for all community debts. This means that if one party has their debts discharged, the other party is now liable, not for their half, but for all of the debt.
You cannot file jointly after divorce: Even though your debts may be the same, after divorce you cannot file a joint petition; you must file two separate petitions. This means that you will have two filing fees and two legal fees if you are (hopefully) represented by an attorney. So that is one knock against filing afterwards.
You may lose out on certain exemptions if you wait to file as well. In Arizona, there are many exemptions that are doubled for a married couple, such as the auto exemption. You may be putting some of your property at risk if you wait to file.
On the flip side, if you did not qualify for a chapter 7 under the means test while married with two incomes, you may qualify as a single person.
An ongoing chapter 13 is a totally different animal:<a the above deals with a chapter 7 bankruptcy – or a liquidation bankruptcy. These usually only take a few months to complete. A chapter 13, on the other hand, involves a payment plan over 3 to 5 years. The payment plan is based on the couple being married. This will not survive a divorce. If you are under a chapter 13 payment plan and are contemplating divorce, you will need to speak with your bankruptcy lawyer about this right away.
As always, it is best to discuss the particulars of your situation with an experienced attorney before doing anything about divorce or bankruptcy.