Divorcing and bankrupt?

Divorce and bankruptcy often go hand-in-hand, especially in today’s economy.

Divorce can lead to financial challenges. When spouses decide to divorce, they are splitting their property into two and going from two incomes to one. This is a significant financial change that few people are able to anticipate.

Similarly, financial challenges can lead to divorce. Money issues are one of the leading causes of divorce. Furthermore, the financial stress brought on by overwhelming debt can challenge even the strongest of marriages.

Thus, it is not uncommon for bankruptcy clients to seek divorce and divorce clients to seek bankruptcy. Yet, couples considering both bankruptcy and divorce need to know that the order in which they file matters, and often depends on a couple’s unique situation.

Bankruptcy before divorce

Usually, it is best to file for bankruptcy, then divorce.

First, spouses can file for bankruptcy together, which means they do not need to pay two separate filing fees.

Second, bankruptcy includes an automatic stay, which stops the property division aspect of a divorce. After bankruptcy, property division can be simpler, since many of the debts can be discharged through bankruptcy and will no longer need to be divided.

Finally, by filing for bankruptcy together, you and your spouse will both be released from liability for the debts discharged during bankruptcy. If only one spouse files for bankruptcy, the other spouse will still be liable for the debts assigned to his or her name, even if they were discharged during the first spouse’s bankruptcy.

Divorce before bankruptcy

For couples who make too much money to file for bankruptcy before divorce, bankruptcy after divorce may be an option. Splitting incomes in half may allow one or both of the spouses to file for bankruptcy alone. Furthermore, since some assets are exempt from liquidation during a Chapter 7 bankruptcy, there is some strategy involved in waiting to file for bankruptcy until after divorce. You may be able to give up your nonexempt property in exchange for more exempt property during a divorce, making a bankruptcy more financially effective.

Before you file for divorce or bankruptcy, speak with an experienced bankruptcy lawyer. Do not consent to divorce or file bankruptcy before you consider all of your options.

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