When a couple divorces, there is much more at stake than their emotional well-being. They must disentangle their finances, establish separate households, and provide for their children’s support and well-being. Bankruptcy and divorce are complex, and every situation is unique. Families need help with different parts of the change. Financial Planning may help you figure out the financial strain while visits to a child counselor could help support your children’s adjustment to splitting time between parents.
Unfortunately, the financial toll of getting divorced is one of the most common reasons that cause people to file bankruptcy, the others being unexpected medical bills, a job loss, or high, uncontrollable credit card debt. In this article, we will try to explain how bankruptcy may result from divorce, and try to help you decide whether bankruptcy or another debt relief option is right for you.
1. Should you file before or after divorce?
This is the first question many divorcing couples ask, and the answer depends on a few things, but the most important are : what joint assets and debts you have and what assets you intend to retain after the divorce. Typically, the answer is based on whether or not you own a home, have equity in it, and if one of you intends to keep it. When this is the case, and in most cases, it is advisable to file bankruptcy jointly before the divorce. As an alternative, a couple planning to divorce might consider exploring other debt-relief options.
Only married couples can file jointly, so if you decide that bankruptcy is your best option, collaborate on a joint filing at this stage of your relationship because it may be prudent for you to do so. All individual and joint non-priority debt will be discharged, and in some cases, even income tax deb, leaving you both with a clean slate moving forward.
Sometimes, when your two incomes are combined you earn too much to file Chapter 7 jointly, then filing two separate Chapter 7 cases, may be an option. This will entail twice the legal and court filing fees, but the alternative is filing a Chapter 13 case, which will tie you up for three or five years.
Filing a Chapter 13 case is another option, but because most divorcing couples would prefer to move on rather than deal with each other for an additional three or five years, it is less likely. Nonetheless, it may be financially prudent for you to file a joint Chapter 13 case if:
- The marital home is worth less than the balance owed on the first mortgage, and you have a second mortgage or a HELOC. The second mortgage or HELOC can be “stripped off” as unsecured and discharged.
- You own one or more cars that are worth less than the car loan balance. You can “cram down” the car loan to the current value and pay it off at prime plus 1-3% in your joint Chapter 13 case, the remaining balance of the loan is discharged as unsecured, and you own the car when you complete your plan.
- You need to catch up on mortgage or car loan payments, or you are being threatened with foreclosure or repossession.
2. Should we file bankruptcy jointly or separately?
The answer to this question depends mostly upon the nature of your relationship. For most divorcing couples, it is best to file jointly if at all possible, however, not every couple going through a divorce has the ability to collaborate on a joint filing.
Filing bankruptcy jointly means multiplying your exemptions by two, increasing the amount of jointly-owned property you can prevent from being seized and sold by the Trustee. If you own a home and one of you intends to retain it after the divorce, you can apply for the homestead exemption and the wildcard exemption to exempt all equity from your bankruptcy estate, placing your home out of the reach of the Trustee who otherwise would seize and sell the property for the benefit of your creditors.
If one of you files bankruptcy prior to divorcing and the other does not, the non-filer will be responsible for all joint debt that is discharged as far as their creditors are concerned. However, the non-filers divorce attorney can negotiate for or argue for partial or equal repayment of those debts in the property settlement agreement. Ultimately, the family law judge will decide how assets and responsibility for debts are assigned.
3. How equitable distribution and the division of assets in a divorce and affects your bankruptcy.
If you file bankruptcy after your divorce, the division of assets in your property settlement agreement will dictate what assets you must exempt from your bankruptcy estate. All of your assets provided for in the property settlement agreement must be disclosed in your bankruptcy filing. Again, consider how much equity you have in the marital home and whether you are able to exempt it prior to filing bankruptcy.
Any support payments received must be disclosed as income, and any support payments made must be disclosed as an expense.
4. Who is responsible for the debt in a divorce?
In New York, the responsibility for debt will be dictated by the contracts you have with your creditors and whether the Court orders either of you to help pay any debt that is not joint. This is often done when negotiating the distribution of property, determining offsets, or forgiving or imposing spousal support obligations.
5. Does filing for bankruptcy help with child support issues?
First, know that as a matter of public policy, neither child support nor spousal support or alimony are dischargeable in bankruptcy. However, by filing Chapter 13, someone owing back support can cure past-due support obligations through their plan and pay them over three or five years. Also, having other unsecured debt discharged in bankruptcy may make support payments more affordable for the support obligor.
Bankruptcy is but one of the many debt relief options a divorcing couple should consider when their financial situation is untenable. Do your research, and if at all possible, discuss your financial goals with each other. The more you can collaborate and agree on how to handle your financial situation, the better off you both will be following your divorce.