Divorcing and Bankrupt: What Order To File?

by Hermin Dowe on November 3, 2014

Divorce is a difficult matter. At the time, it feels impossible to disentangle your affairs from your spouse’s. It is important to make sure you and your spouse are on the same page in all respects, including financial. Some couples find it advantageous to file bankruptcy before getting divorce; others find it simpler to file individually once the divorce is finalized. Both options contain pros and cons. Expert advice can come in handy.

Divorce First

There are several situations where it may simply be easier to divorce before filing bankruptcy. The most obvious would likely be if you and your spouse have more property than you could exempt in a joint bankruptcy. California’s exemptions are fairly generous, and if you and your spouse are filing jointly, you each get to claim a set, instead of only one being available. However, if you will not be able to exempt enough under these strictures, it may work to your advantage to divorce first and then exempt only your property.

Another reason to divorce first is if the bankruptcy you are planning will be a Chapter 13, or restructuring bankruptcy. The reasoning behind this is that Chapter 13s are about debt repayment - they take anywhere from a few months to a few years to be wound up, and waiting that long is likely untenable for most spouses who are already planning for divorce.

In terms of a Chapter 7 bankruptcy, your household income may actually determine whether you are able to file bankruptcy before or after your divorce. There are limits on the amount of income you can have before you are precluded from filing Chapter 7 - you must pass the means test in order to qualify, unless your household income is below the California median income for your household size. If your income is below that median, there is a presumption that you will qualify, and you are exempt from the test.

Bankruptcy First

The major reason to file for bankruptcy (jointly or as individuals, though most couples file jointly) before divorce is that no debt created by a divorce is dischargeable in a Chapter 7. This means that if a spouse winds up liable for the other spouse’s debts, they must be made whole.

For example, say that you and your spouse were both named on a line of credit that was somehow forgotten or neglected in the divorce. Your spouse used that line of credit and ran up a debt. You are still named on that debt - you are reachable by that lender. If your spouse files for bankruptcy, you may be called upon to pay that debt. Your spouse can write off the debt to the lender, but not to you - they now owe you the debt, and 11 USC § 523 mandates that it cannot be discharged, because the debt to you would not exist if you had not divorced.

Contact A Bankruptcy Attorney Today

If you are dealing with the specter of divorce and bankruptcy, sometimes an expert can be the best help you can have. The attorneys at the Dowe Law Firm will do our best to assist. Contact us today. We serve Contra Costa, Solano and Alameda counties.

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