Going through a difficult divorce during the COVID-19 pandemic can be bad enough, but your difficulties will multiply if you lose your job or face expensive medical care. You may need to file for bankruptcy as well as get a divorce. Even if you don’t catch the virus or lose your job, divorce adversely affects most family finances and is the leading cause of bankruptcy in America. If you and your spouse are considering a divorce and filing for bankruptcy at the same time, you need to consider the following issues before you proceed.
Should I File Both at the Same Time? Most experts don’t recommend filing divorce and bankruptcy petitions at the same time because the bankruptcy court will place a stay on all financial transactions and that will delay your divorce for months or even years. Moreover, if you file bankruptcy and divorce petitions at the same time, that will complicate the process enormously and make it difficult to divide assets because two different courts and sets of laws are involved.
Which Comes First? Since you shouldn’t file bankruptcy and divorce petitions at the same time, does it matter which you file first? It depends on your individual situation. If you and your spouse are on decent terms and can cooperate with each other—especially if you have decided to opt for a collaborative divorce–it’s generally better to file for bankruptcy first because you can share the cost of an attorney, all filing fees, and gain extra protection from joint debts. Moreover, many jurisdictions allow double exemptions on assets when you file a joint bankruptcy. This means if the single exemption for a home is $75,000, a couple filing for bankruptcy jointly can enjoy a $150,000 home exemption. Consult a bankruptcy attorney in your area to see what options are available to you. Moreover, the bankruptcy court may divide your assets for you, which may make it easier for you to complete the divorce—although that may lead to difficulties if the bankruptcy judge and couple don’t agree about how assets should be divided.
Should I Choose Chapter 7 or 13? A major advantage of Chapter 7 bankruptcy is that dischargeable debts can be eliminated within three to six months of filing. In contrast, Chapter 13 bankruptcy generally establishes a three to five-year payment plan for dealing with debts rather than eliminating dischargeable debts immediately. If you are already involved in a Chapter 13 bankruptcy repayment plan and decide you need a divorce, you can withdraw from the payment plan, but the debts you and your spouse assumed will not be discharged—they must still be paid. You will have to negotiate who pays which debt during the divorce. Talk to a bankruptcy and a collaborative divorce attorney before making this decision.
Only Some Debts Are Discharged. If you decide to declare Chapter 7 bankruptcy, make certain you know which debts can be discharged and which are exempt and will still need to be paid after the bankruptcy process is final. Some classes of debt, such as alimony, child support, fines or fees owed to the government, student loans, federal income taxes, court fines, and attorney fees generally cannot be discharged in Chapter 7 bankruptcy. Also, its important to follow the bankruptcy rules carefully. If you fail to supply the proper tax documents, hide property, destroy financial records, commit perjury, violate a court order, or fail to complete credit counseling, the bankruptcy judge may deny your petition.
If you want to file for bankruptcy and your spouse doesn’t, it’s probably best to file for divorce first and then enter bankruptcy yourself after the divorce is final. However, if your home is threatened with foreclosure or creditors have filed to garnish your wages, you should discuss filing for bankruptcy first to stop the foreclosure and garnishment. You can always file for divorce later. As you have seen, dealing with divorce and bankruptcy at the same time can be complicated. It’s best to consult a collaborative attorney and a reputable bankruptcy attorney before you decide how to deal with these complex issues.