Bankruptcy and Divorce: Which Should I File for First?
Bankruptcy and divorce sometimes go hand in hand, and financial issues are often cited as a major cause of marital strain. But if you are considering filing for bankruptcy and divorce, which one should you address first? Does the order really matter? There are several good reasons to file for bankruptcy prior to divorce — and vice versa. It depends on factors such as your goals, your budget, and the chapter you are filing under.
Filing for bankruptcy is never an easy decision. If you are considering filing for divorce or are in the middle of one, the added stress of bankruptcy might not be something you want to undertake. However, depending on your situation, filing for bankruptcy before filing or finalizing a divorce might be in your best interests.
The Philadelphia bankruptcy lawyers understand that anyone thinking about filing for bankruptcy has questions. When divorce is added into the equation, the number of potential questions increases exponentially. Before moving forward with your divorce, you should discuss your particular situation by calling Young, Marr & Associates at (215) 701-6519 if you are in Pennsylvania or (609) 755-3115 if you live in New Jersey.
When Should I File For Bankruptcy?
One of the biggest concerns where divorce and bankruptcy are interrelated is the timeline of the case. Chapter 7 bankruptcy takes only a matter of months, which means you could feasibly file, quickly receive your discharge, and then “switch over” to filing for divorce.
By contrast, Chapter 13 takes far longer at three to five years — so if you want to wrap up your bankruptcy prior to getting divorced, you may have a very long wait ahead of you. In that instance, it is probably more prudent to file for divorce prior to moving ahead with bankruptcy.
While timing is an important consideration, the goal of filing for bankruptcy is eliminating or reorganizing your debt. Your marital status plays an important role in how your income, assets, and debts impact a bankruptcy case.
Qualifying for Chapter 7 Before or After a Divorce
If you and your spouse only have unsecured debt, you might consider filing a Chapter 7 case before divorcing. Most people prefer Chapter 7 because a filer can eliminate their unsecured debt in a matter of months without having to pay any of their creditors. Two important factors are used to determine whether you qualify for Chapter 7. Both are influenced by your marital status.
The Means Test
Prior to filing for bankruptcy, you must take the Means Test to help determine which chapter is most appropriate for your budget. If Means Testing determines that your income exceeds the median income for your state, you will not be permitted to use Chapter 7. So how does your marital status affect the Means Test?
The Means Test looks at your household income for the previous six months and compares it to your state’s median income. The median income is based on household size. This is where your marital status comes into play. If you have children, the additional household members could be the difference between qualifying for Chapter 7 or not. Additionally, if one spouse makes significantly less money, you might qualify as a two-person household when you would not qualify as a single filer.
However, if your income is substantially less than your spouse’s, you might be able to qualify for a Chapter 7 without their income. In this case, it might be in your best interest to file and eliminate your personal debt and your share of any shared obligations.
One of the biggest fears people have regarding filing for bankruptcy is losing their property, including their home, car, or other personal assets. This rarely occurs for two reasons. First, there are protections in place that allow most debtors to keep their property. Secondly, if you have non-exempt property that you would lose, our Pennsylvania bankruptcy lawyers will generally recommend filing Chapter 13.
Your marital status will impact your exemptions. When you file jointly, your exemptions double. This increase allows you to protect more property. In some cases, filing jointly could be the difference between being able to exempt your home or your car.
Type of Debt
Many couples share debt, including credit cards and personal loans. If your spouse files for bankruptcy and discharges their debt, you are still legally obligated to pay the full amount – whether you incurred the full amount or not. When couples have shared debt, it usually makes financial sense to discharge it through one bankruptcy instead of two separate filings.
Filing for Chapter 13 Before or After a Divorce
So, how does divorce impact a Chapter 13 case? First, many of the same things that affect a Chapter 7 bankruptcy will influence your Chapter 13 filing.
Unsecured Debt and a Chapter 13 Case
A Chapter 13 bankruptcy case permits a debtor to reorganize their debt. Depending on your situation, Chapter 13 could allow you to pay back an overdue mortgage or protect a vehicle from repossession. However, for people who do not qualify for Chapter 7, the most beneficial advantage of Chapter 13 is paying their creditors significantly less than they owe through their Chapter 13 plan. For example, even though you do not qualify for Chapter 7, a Chapter 13 debtor could reduce a $75,000 unsecured debt to $20,000 or $25,000 depending on the Means Test. Your household size and combined income could impact your disposable monthly income – or the amount you would have to pay to unsecured creditors. If you are your spouse have a substantial amount of unsecured debt, you might be able to pay significantly less of it back if you file jointly. If each spouse files as an individual, the amount they will have to pay back could be considerably more.
Foreclosures and Divorce
The most valuable asset most people own is their home. If your home was in foreclosure before you decided to file for divorce, filing for bankruptcy might be the only way to save the property. To qualify for Chapter 13, you must prove you have the available income to fund your bankruptcy plan and pay your reasonable monthly expenses. Without both incomes, it might not be feasible to pay both the regular mortgage and the arrears through the Chapter 13 plan. Even if you do not plan to keep the property, it is more advantageous for you to sell it without the threat of foreclosure or a sheriff’s sale.
While there are some benefits of filing a Chapter 13 before a divorce, there is one major drawback. Unlike a Chapter 7 case, which lasts four or five months, a Chapter 13 case could last up to five years. This is a long time to be involved with a legal proceeding with someone you intend to divorce. Our Pennsylvania bankruptcy attorneys will help you weigh the pros and cons of entering into such an arrangement. In some cases, saving the equity in the family home or paying a very small percentage of your debt might be more important than moving forward with the divorce.
Bankruptcy and Divorce
Additionally, if you are filing for bankruptcy, whether it is a Chapter 7 or Chapter 13 case and are in the midst of a divorce proceeding, there could be a conflict of interests in representing both parties in a joint bankruptcy. When both spouses have legal representation for their divorce, you will have to sign a “conflict of interest waiver,” indicating that you understand the legal implications of being represented by one attorney.
Outside of the legal implications, it is also important to remember that a divorce is an emotional event and it will impact your relationship with your soon-to-be ex-spouse. Bankruptcy requires cooperation in terms of working with our Allentown bankruptcy attorneys, gathering financial documents, and answering personal questions. If you are uncomfortable with any of this, filing for bankruptcy after you have completed your divorce might be in your personal best interests.
How Filing for Bankruptcy Can Save You Money in a Divorce
Depending on when and how you choose to file, you could potentially save some money on your bankruptcy. If you are on good terms with your spouse and feel confident you will be able work together, you may want to consider filing jointly prior to parting ways. This is the financial equivalent of killing two birds with one stone, because by filing jointly, you will not have to pay separate filing fees. (Currently, the filing fee for Chapter 7 is $338, while the fee for Chapter 13 is $313. These fees are subject to change, so be sure to stay updated.)
More significantly, you can also double your exemptions. It should be noted that while this is not an option in every state, doubling is permitted in Pennsylvania and New Jersey. Doubling exemptions is exactly what it sounds like: each spouse is allowed to claim the full exemption for the property that he or she owns. You cannot double property you do not personally own (e.g., only one of you owns a vehicle). For example, if you live in Pennsylvania and choose to double the federal homestead exemption, you could claim up to $50,300.
But while filing together can help save you money on bankruptcy, filing separately could help you save money on divorce. Your bankruptcy case will address matters such as property, assets, and how they are divided, so if these matters have already been outlined by a trustee before you begin a divorce, the divorce itself can be that much smoother, quicker, and cheaper.
Our Pennsylvania Bankruptcy Attorneys Can Help You
Bankruptcy is a complex matter and filing becomes even more complicated when divorce enters the picture. If you are thinking about filing for Chapter 7 or Chapter 13 in Pennsylvania or New Jersey, a bankruptcy lawyer at Young, Marr & Associates may be able to help. To schedule a completely free and confidential legal consultation, call our law offices at (609) 755-3115 in New Jersey or (215) 701-6519 in Pennsylvania, or contact us online today.