Divorce and bankruptcy are among the most stressful and emotionally fraught experiences anyone can endure, and dealing with both at the same time can seem overwhelming.
If you’re facing that prospect, it may be hard to take comfort in assurances about new beginnings (however true they are), but maybe it will help to know others have made it through the ordeal, and to learn some proven strategies for making the processes go as smoothly as possible.
Before putting divorce and bankruptcy into motion, you should understand that it’s unlikely the two proceedings can truly take place simultaneously. You can file legal motions at the same time, but in most jurisdictions one case will take precedence over the other. If both cases are pending simultaneously, bankruptcy is typically suspended until the divorce court apportions marital debts and assets to each party.
Juggling the two legal actions will only complicate your situation, so for simplicity’s sake, you may want to consider filing for divorce before tackling bankruptcy. Certain circumstances, however, can make it more desirable to file bankruptcy first, and then address divorce.
Deciding the best order in which to handle divorce and bankruptcy will depend on your financial situation and the laws that apply in the jurisdiction where you live. You should consult legal counsel before starting either process to determine which makes the most sense for you. In a nutshell, here are the advantages to handling divorce before bankruptcy, and vice-versa.
A main advantage to filing bankruptcy before divorce is the potential for cancelling joint marital debts that would otherwise have to be divided up as part of divorce proceedings, and then tackled separately in each spouse’s bankruptcy. A joint bankruptcy filing requires cooperation between the spouses, but it can significantly streamline the divorce process, reducing legal fees and time commitment for both parties.
In many states, a couple filing for bankruptcy can keep a larger portion of their assets than they would when filing for bankruptcy individually, after a divorce.
When Does It Make Sense to File for Divorce Before Bankruptcy?
The main case for filing for divorce before bankruptcy has to do with meeting the qualifications in your state for Chapter 7 bankruptcy. In contrast with Chapter 13 bankruptcy, which cancels certain types of debt but requires negotiating with creditors to structure a yearslong repayment plan, Chapter 7 cancels qualifying debts altogether. To meet the qualifications for Chapter 7, your income must fall below than that of the median for your state. In households where one spouse earns most or all of the income, completing a divorce before filing for bankruptcy can enable both parties to qualify for individual Chapter 7 bankruptcies.
Whether you pursue divorce or bankruptcy first, it’s important to know going in that it may not be possible for either process to completely disentangle your finances from your soon-to-be ex-spouse’s.
For example, Chapter 13 plans on marital debt may leave both parties legally responsible for repayments. There are also categories of debt that bankruptcy cannot discharge (student loans, for example), and if you or your spouse cosigned on such a loan, you may be equally responsible for seeing to it that those debts are paid, even after divorce and bankruptcy.
Bankruptcy has severe, long-lasting negative consequences for individuals’ credit scores and eligibility for loans or credit cards. While divorce doesn’t directly affect individuals’ credit, the aftermath of divorce can lead to circumstances that bring down credit scores as well. Those situations—and the long road to recovery from the credit impact of bankruptcy—will only be complicated if either party withholds payments or otherwise uses joint debt to spite the other party.
Getting through bankruptcy and divorce is never easy, but with a sound strategy and some good faith on the part of both spouses, it’s possible to move on from them and start regaining a solid financial footing within a few years.