Which Comes First: Divorce or Bankruptcy?

Divorce and bankruptcy are often intertwined. Sometimes financial pressures lead to marital strain and divorce, and sometimes a divorce divides financial resources between two households resulting in financial hardships. If a couple is contemplating divorce and bankruptcy the timing of each legal proceeding can be crucial to achieving the best outcome possible.

In most circumstances, it makes more sense for a couple to file for bankruptcy protection prior to their divorce, particularly if division of the debt is anticipated to be a contentious issue in the divorce process. If eligible, couples can eliminate all of their unsecured debt using Chapter 7, pay only one set of legal fees and costs and remove the debt issue from the divorce proceedings. It's often said in the business "Divorce your debt before divorcing each other."

Even when a Chapter 7 is not possible, a jointly filed Chapter 13 may provide significant benefits to couples getting divorced. Often times the budget in a Chapter 13 can account for the parties living separately while still allowing the couple to take advantage of the benefits of bankruptcy protection, such as removing junior mortgages from the marital residence and paying only a percentage of unsecured debt.

Additionally, when someone declares Chapter 7 bankruptcy, the court will determine what assets the person may have that can be sold to pay creditors. If the couple is in the process of getting a divorce, the bankruptcy process essentially freezes the assets that they were about to divide. This delays the divorce process because the divorce judge does not have the authority to divide the property that the bankruptcy court may be about to use to pay creditors. In such a situation, it may be best to wait to divorce until the Chapter 7 bankruptcy process has finished.

On the other hand, in some instances, it may be best to wait to declare bankruptcy until the divorce process is finished. One example is if the couple is still living together, in which case the income of both spouses is considered for the means test used to determine if someone qualifies for Chapter 7 bankruptcy. If the couple's combined income is too high, then a spouse may not qualify for Chapter 7 until the couple has separated.

If one spouse declares bankruptcy after the divorce, it can still affect the other. On the positive side, the bankruptcy may remove mountains of credit card debt, leaving more money each month to pay bills or child support. On the negative side, if the credit card debt was originally in both names-even if the divorce stipulated that one spouse assumed that debt-then the credit card company may come after the other spouse to collect the debt.

As these examples illustrate, the best route for a couple facing bankruptcy and divorce to take is to consult with a bankruptcy attorney in addition to their divorce attorneys. A bankruptcy lawyer will help a couple determine how best to proceed for their specific situation.