How to Manage Joint Debts Within Bankruptcy and Divorce
When bankruptcy and divorce cross paths, it adds a whole new level of complexity to family law cases. The way these two legal issues mix can make it tougher and take longer to settle disputes between married couples.
Decisions made in bankruptcy court can change how assets are divided, debts are assigned, and even how much spousal support one might get during a divorce.
This blend of bankruptcy and divorce introduces a lot of challenges that need careful thought. How these two processes interact can really affect what happens in both cases, making it essential for anyone dealing with both to understand how they influence each other.
Joint Debt Discharge
Joint debts are those financial obligations that both partners have agreed to pay back together, like a mortgage, a car loan, or credit card debt. During a divorce, these debts need to be split up along with any assets. How they are handled in bankruptcy can vary depending on the kind of bankruptcy and the state laws.
If one partner files for Chapter 7 bankruptcy, eligible debts could be wiped out, freeing both people from having to pay. But, if only one person files, creditors might still go after the other partner to collect the full amount of the debt. [1]
In Chapter 13 bankruptcy, a repayment plan includes joint debts. The spouse who files might be responsible for paying these debts through the plan, but the other spouse could still face collection efforts for any part of the debt that is not paid after the bankruptcy ends. [2]
Order of Filing for Bankruptcy and Divorce
The order in which you handle bankruptcy and divorce can have a big impact on how assets get divided.
If you decide to go through bankruptcy before getting divorced, it can make it easier to deal with splitting up debts and assets because it can get rid of joint unsecured debts. But keep in mind this might also stretch out the time it takes to finalize the divorce.
Pros and Cons of Filing for Bankruptcy Before Divorce
Advantages
- Going through bankruptcy before a divorce can help get rid of or sort out any shared debts from the marriage. This can be a big help to both people, especially where both are equally responsible for debts made together.
- Dealing with these debt problems early on can give a clean slate for the divorce process.
- Bankruptcy can also make things more equal between the partners, especially if one has more debt than the other. This can lead to a more balanced split of assets and debts when it's time to finalize the divorce.
Disadvantages
- Starting bankruptcy before a divorce can slow down the whole divorce process.
- Filing for bankruptcy first might mess up financial plans for both partners.
- It can change what they expected for things like spousal support and splitting up what they own.
- If debts are cleared in bankruptcy, one person might end up with less money than they thought after the divorce.
You need to think carefully about whether to go through bankruptcy before divorcing. Look closely at your finances, what you owe, and how things might turn out. It is smart to talk to experts who understand both bankruptcy and divorce before making a decision.
Pros and Cons of Filing for Divorce Before Bankruptcy
Advantages
Getting divorced before filing for bankruptcy can make it easier to clearly separate what each person owns and owes.
This split can make the bankruptcy process simpler since it will be clear who is responsible for which debts and who owns which assets, making everything more straightforward.
Once everything is divided up, each person might find that they can get better terms in bankruptcy. For example, having fewer assets might make it easier to qualify for Chapter 7 bankruptcy, which could help them clear their debts faster. By handling bankruptcy separately after the divorce, both partners can avoid the complications that come with filing jointly, leading to a smoother process and possibly better results for each person.
Disadvantages
Getting divorced before filing for bankruptcy can bring about some tough legal and money-related issues, especially if one person ends up with more debt than the other.
This situation can be tricky because the person who owes more might have a hard time getting help through bankruptcy, especially if they still need to make alimony or child support payments.
Joint vs. Individual Bankruptcy Filings
Couples need to think about whether they should file for bankruptcy together before their divorce or do it separately afterward. Filing together can make sorting out debts easier, but it might not be a good idea if the divorce is messy.
Filing individually after the divorce gives each person their own clear financial path, but they will need to be careful regarding any debts they still share.
If you are going through bankruptcy and divorce and require legal help, then contact Frego & Associates today.
FAQs
When one spouse files for bankruptcy, how shared debts are managed depends on the bankruptcy type. In Chapter 7, eligible debts might be cleared, freeing both from payment obligations, but creditors may still seek full payment from the non-filing spouse. Chapter 13 involves a repayment plan that might include shared debts, yet the non-filing spouse could remain responsible for any remaining amount after bankruptcy ends.
The choice between filing for bankruptcy before or after a divorce hinges on your financial circumstances and how complex your divorce is. Bankruptcy before a divorce can ease the division of debts and assets by clearing unsecured debts, though it might slow down the divorce. Conversely, divorcing first can clarify assets and liabilities, making bankruptcy smoother but possibly more complicated if one ends up with more debt.
Deciding whether to file jointly when still married or individually after a divorce depends on your financial situation and the state of your relationship. Filing jointly might simplify debt management, but it might not be ideal if the divorce is contentious. Filing individually afterward allows each spouse to handle their own finances, though shared debts must be carefully managed to avoid issues.
Sources:
[1] Chapter 7 – Bankruptcy Basics. (n.d.-b). United States Courts. https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-7-bankruptcy-basics
[2] U.S. Courts. (n.d.). Bankruptcy basics: Chapter 13 – Individual debt adjustment. https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics
