When possible, it’s often a good idea for a divorcing couple to file for bankruptcy. If the couple qualifies to wipe out (discharge) credit card balances, medical bills, or personal loans in a Chapter 7 case—and both spouses can work together—the couple will be able to avoid a common source of dispute in a divorce proceeding. (A Chapter 13 bankruptcy won’t be feasible because of the three- to five-year repayment plan requirement.) An alternative to filing for bankruptcy together is to structure a marital settlement agreement in a way that allows each spouse to discharge as much debt as possible if bankruptcy is necessary after the divorce.
Filing for Bankruptcy as a Couple
Dividing the marital debt is one of the tasks that couples must complete in a divorce. Filing a Chapter 7 bankruptcy can streamline the process by eliminating the following types of debt:
- credit card balances
- personal loans
- overdue utility bills, and
- executory contracts, such as a car lease or a gym membership.
The couple must pass the bankruptcy means test by demonstrating that their combined income (after expenses) doesn’t exceed the state median income for the family size. Qualifying isn’t always easy, however—especially after a long marriage. It’s not uncommon for one spouse’s income to push the couple’s combined income over the means test limit.
In that case, there’s another way a couple might satisfy the means test. A couple living separately but not yet divorced can file jointly and can claim the expenses of both residences (rent, utilities, food, and the like). The additional cost might be enough to qualify the couple for a Chapter 7 discharge.
If it’s impossible for a couple to file together—even when living apart—with planning, one or both spouses might be able to file an individual case (more below).
Filing Individually Before the Divorce
Sometimes one spouse will want to file for bankruptcy even though the divorce isn’t final. Although it’s possible to do so, it’s important to realize that filing an individual bankruptcy will wipe out debt in the filer’s name only—not the obligation of the nonfiling spouse (called a “codebtor”).
For instance, it’s common for couples to have a joint credit card in both names. Or the couple might live in a community property state (each spouse is responsible for paying any debt incurred during the marriage). Because filing for bankruptcy wipes out the filer’s debt only—not the debt of a codebtor—problems can arise. The family law court might order both spouses to split the payment responsibility of a debt, even though one of the spouse’s payment responsibility was wiped out in a bankruptcy filing.
Example. Jake and Misha owed $20,000 on a credit card. Jake filed a Chapter 7 bankruptcy during the divorce and wiped out his responsibility to pay the debt. Afterward, the family law court divided the marital debt equally and ordered Jake to pay $10,000. Although the credit card company can’t collect against Jake, Misha can ask the court to force Jake to pay the ordered amount.
Consulting with a bankruptcy attorney before you finalize your divorce papers can help you save money. An attorney knowledgeable in both bankruptcy and family law will structure your settlement so that you’re in the best possible position to get rid of your debt.
If you aren’t proactive with your financial planning, your bankruptcy filing might not provide you with as much relief as you’d like—and you’ll have to wait years before you’ll be eligible for another discharge.
Filing Individually After the Divorce
Many people have an easier time qualifying for bankruptcy after a divorce—especially when supporting children. You’ll likely have the same amount of expense deductions but less income.
If you’ve been ordered to pay a domestic support obligation—for instance, child or spousal support—you won’t be able to wipe it out in bankruptcy. However, you will be able to discharge a property settlement in a Chapter 13 case if, for instance, you must pay for property you kept in the divorce.
To do so, you’ll be required to complete a three- to five-year Chapter 13 repayment plan. You’ll pay all of your disposable income to your creditors through the plan. If, upon its completion, you still owe a portion of the settlement amount, the balance will get wiped out along with the balances on credit cards, medical bills, and other dischargeable debts.
It’s important to know that if you’ve fallen behind on a child or spousal support obligation, you’ll be required to pay the entire arrearage amount in your plan. The larger the arrearage amount, the harder you’ll likely find it will be to show you have sufficient income to make the monthly payment—a requirement you must meet before a Chapter 13 plan will be approved by the court.
Example. The family law court ordered Kathy to pay Jon $500 per month in spousal support, plus $100,000 in a property settlement. Shortly after that, she lost her job and fell behind on her bills. When she found a new job, she owed $10,000 in credit card debt, $20,000 in spousal support arrearages, and the entire $100,000 property settlement. If she decides to file for Chapter 13 bankruptcy, she’ll have to demonstrate that she can pay her basic living expenses, her $500 spousal support payment, plus $333.33 per month (the spousal support arrearages) for 60 months (more if she chooses a 36-month plan). Any additional disposable income will go toward paying down her credit card debt. After completing the plan, the outstanding balances on the credit card debt and arrearages will get wiped out.
(You’ll find more information in the article Bankruptcy After Divorce.)
Consult With a Knowledgeable Attorney
Family law issues in bankruptcy can be complicated. Addressing all of the possible issues is beyond the scope of this article.
It’s important to understand that the contents of your divorce decree or marital settlement agreement will often determine the effectiveness of a bankruptcy filing. When possible, you’ll want to plan for your bankruptcy before finalizing your divorce by consulting with an attorney who is familiar with both bankruptcy and family law.
Questions for Your Attorney
- Does it make sense to file for bankruptcy before our divorce is final?
- Can you structure our marital settlement agreement so that we will both be in a good position to file for bankruptcy after the divorce, if necessary?
- Can you ensure that my divorce documents will stop my spouse from discharging any amount owed to me in bankruptcy?