Financial problems are one of the leading causes of divorce. The stress associated with financial struggles often causes couples to part ways and decide to start over on their own. In some cases, things are so bad financially that the spouses may also be financially insolvent. When this is happens, they may feel like they have little choice but to file for bankruptcy along with dissolving the marriage. This can further complicate matters and add to the stress involved in the situation.

It is important to understand that bankruptcy and divorce are two entirely separate legal proceedings. That said, filing for bankruptcy can have an impact on the divorce proceeding in a number of ways, depending on your specific circumstances. Before starting the marriage dissolution process, it is a good idea to look at how bankruptcy will affect your situation, and whether or not it makes sense to file (for bankruptcy) before or after the divorce.

Here are some important things to know about divorce and bankruptcy to help you decide the best way to proceed:

You Should not File for Divorce and Bankruptcy at the Same Time

While you could file for bankruptcy before or after a divorce (depending on the situation), it is generally never a good idea to initiate the two proceedings simultaneously. When you file for bankruptcy, an “automatic stay” goes into effect as soon as you file, halting creditors from contacting you and freezing your property and assets.

The automatic stay remains in effect until the completion of the bankruptcy process. While the automatic stay does not impact child custody or child support, it could seriously complicate the division of the marital estate, because this property would now be under the control of the bankruptcy trustee. This could create extended delays and make it far more stressful for everyone involved.

The Type of Bankruptcy makes a Big Difference in the Order of Filing

There are two main types of bankruptcy available to individuals; Chapter 7 and Chapter 13. Chapter 7 is considered a “straight bankruptcy” or “liquidation” in which all eligible debts are discharged, and non-exempt assets are liquidated to pay creditors. This type of bankruptcy can usually be completed within just a few months. Chapter 13, on the other hand, is a court-managed debt consolidation/reorganization plan that takes three to five years to complete. 

Because of the length of time involved, it is almost always best to wait until after the divorce is finalized if you are planning a Chapter 13 bankruptcy. Because of the short length of time involved with a Chapter 7, it often makes sense to do it before the divorce process, although there are some circumstances in which it is better to wait until after the divorce is finalized.

There are Several Reasons to Consider Filing Chapter 7 Bankruptcy before a Divorce

If your current relationship with your soon-to-be ex-spouse is fairly amicable, there are several potential advantages to filing for Chapter 7 first before you go ahead with the divorce. For one thing, doing the bankruptcy together allows you to share the filing and legal expenses. A joint bankruptcy also allows you to get rid of qualifying joint debts; such as credit cards or personal loans with both of your names on them. Removing these debts can make the division of the marital estate far less complicated during the divorce proceeding later on.

One of the most important benefits of filing Chapter 7 jointly before a divorce is that you receive a double exemption on the personal property you are allowed to keep. For example, in Alabama, you are allowed to claim an exemption of up to $15,500 for a mobile home or real property (as long as it does not exceed 160 acres), and a “wildcard” exemption of up to $7,750 on personal property. These exemption amounts would be doubled if you file Chapter 7 bankruptcy jointly with your spouse.

Although filing for Chapter 7 bankruptcy before a divorce often makes sense, it is not the right strategy in every case. For example, one common instance in which you would not want to go this route is when the combined income of you and your spouse would put you over the threshold to qualify for Chapter 7. In such cases, you would either need to look at filing for Chapter 13 before the divorce (which, as we discussed earlier, is highly impractical and not a good idea), or filing for Chapter 7 individually after the divorce is finalized.

Not all Debts are Dischargeable through Bankruptcy

Finally, it is important to remember that you cannot get rid of all your unsecured debts through Chapter 7 bankruptcy. Some of the most common types of debts that cannot be discharged include:

•           Student Loans

•           Most Tax Debts

•           Court Fines and Other Government Agency Debts

•           Child Support

•           Alimony

•           Attorney Fees for Custody and Support Cases

There is no bankruptcy protection for these types of debts, so the timing of the bankruptcy filing will not help you eliminate them – you will be obligated to pay these regardless of what legal approach you choose.

Contact an Experienced Alabama Family Law and Bankruptcy Attorney

There are a lot of couples that need to file for bankruptcy and divorce during the same season of their lives, but these are two separate areas of the law, and not every attorney or firm practices in both areas. If you and your spouse are facing financial and marital problems, it is best to speak with a lawyer who understands how these areas of law intersect, and the best legal strategy for your specific situation.

At the Cochran Law Firm – Birmingham, we have extensive experience and in-depth knowledge across a wide range of practice areas (including bankruptcy and divorce), and we work closely with our clients, taking the time to listen and understand their unique needs, so we can customize the most practical, effective, and cost-efficient legal solution.

Contact us today by calling 1-800 – THE FIRM or 205-994-8555. You may also message us online or stop by our office in person at your convenience. We look forward to serving you!