Bankruptcy during a divorce

The decision to consider divorce is a difficult one, even more so when compounded with the prospect of filing for bankruptcy. There is no single solution, but there are some options open to couples contemplating both divorce and bankruptcy. The biggest three questions to ask are the following: (1) whether to file, (2) together or separate, and (3) what order to file them. Getting these answers up front is paramount can avoid headaches down the road.

Working together is best: Most of the time, even when a marriage needs to terminate, couples have much to gain by working together, if at all possible. Just like custody issues (where couples usually try to work together for the benefit of the kids) a cooperative approach in a bankruptcy can have a big payoff down the road. Not only is it possible to combine legal fees and costs by filing together, but also creditors can be dealt with simultaneously and consistently between the spouses, often eliminating most of the issues left to fight about. 

The best example of this is a joint chapter 7 before a divorce is filed. If the couple qualifies for chapter 7 they can jointly eliminate the kind of debt that is in the names of both spouses but for which the benefit really went to only one spouse. 

I had a case where the husband and wife elected to file bankruptcy separately, and they didn’t even consider doing bankruptcy before the divorce.  Instead, in the divorce they painstakingly separated debt responsibilities (who was going to owe what) and 

then divided assets in a way that seemed consistent and fair, considering who was taking over other debt.  
However, afterwards, the ex-husband filed bankruptcy and discharged his responsibility to pay the debt that was jointly owed, for which he previously promised the wife in the divorce decree that he would pay. It was a purchase loan for motorcycle, a truck, and a credit card, all in both names.  Although he couldn’t discharge the divorce decree debt to his wife, there was no way she could collect from him.  And the bank was not bound by the divorce decree.  She felt she had got stuck owing on over $30,000 worth of debt, even though she never wanted any of this and even after these items were repossessed.  What’s worse is she lived off a schoolteacher’s salary, with no ability to pay this, but since he was the only member of her household. Had they filed together first, since he was unemployed, they could have dealt with debt and other debts this first, and they would not have spent so much time and expense negotiating other things around a debt that would no longer exist.  Fortunately, in the end, we were able to help this schoolteacher who later moved back to San Antonio.  This story ends well, but not all separate bankruptcies during a divorce end this way.

Of course, cooperating together is not always possible: we all know this.  When it comes to a chapter 13, attorneys are reluctant about representing a married couple in the longer chapter 13 situation if they are contemplating a divorce anytime soon, because the possible conflict of interest that may emerge.  The lawyer can never “pick” which side he or she thinks has the high road and is the one he could help in any manner that would or could hurt the other.

In order to keep things clean, you at least need to file Chapter 13 (to protect a home that you’re behind on, for example) and if you will likely file for divorce, it’s often best to file the bankruptcy in your name only, in order to protect the home from foreclosure while not creating a future conflict for your attorney.  Alternatively, since Chapter 7 bankruptcy is a much quicker process and can be finalized before a divorce, sometimes within just a few months, a joint bankruptcy can work effectively. The decision on whether to file Chapter 13 or Chapter 7 is a complex decision, involving numerous factors.  You are always recommended to speak with a qualified bankruptcy attorney before making any of these kinds of decisions.
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