While in brighter days you may have vowed never to consider divorce, now you must also consider something else you never thought you would do -- the question of bankruptcy before divorce. There was once a time when both of these choices were unthinkable except under dire need. Now divorce is common and bankruptcy is little more than a tool of financial survival in a time of greater economic complexity and hardship. For individuals, issues of finance are often great sources of stress and difficulty. How much greater is that stress for couples? The damage it can do to a relationship is catastrophic and divorce is often the answer, but it is not the cure.
Why Filing Bankruptcy Before Divorce May Make Sense
Imagine yourself at your kitchen table looking over your debts. You and your soon-to-be ex have agreed quite amicably to divide up the debt evenly and fairly. So far so good, right? You have your debts, she has her debts and all the judge has to do is rubber stamp the agreement. What could go wrong? The main thing that can foul up your best-laid plans is that your divorce agreement is binding upon you and your spouse, not upon your creditors.
That's right; they can do whatever they like and while it is true that most creditors will usually work with you, there are some things you need to remember:
- Debts incurred during the marriage are the responsibility of both parties.
- If your ex fails to pay their debts, you will be stuck with them.
- If your ex files bankruptcy and you do not, you will be liable for the debt.
One answer to these potential problems is to file bankruptcy before you file for divorce. This strategy does have certain advantages. It will save you money and make your divorce more straightforward. However, it requires that you and your spouse cooperate. If that is not possible, or if you think your spouse is hiding assets, then you may have to consider other avenues to protect yourself. Consulting a knowledgeable attorney and doing some research for yourself is the best way to go. There are legal remedies that will keep you from being hit with your ex's bad debt.
Advantages of Filing Bankruptcy
The main advantage of filing bankruptcy before divorce is to know, before going into the divorce process, how your debts will be handled. That will make things easier when you divide up the marital property and, thanks to the automatic stay connected to all bankruptcies, it will eliminate dunning calls and letters from bill collectors. That said, there are a number of things it will not do:
- Shelter you from alimony
- Stop you from having to pay child support
- Eliminate student loans
- Stop you from paying criminal restitution
- Affect the demands of your property settlement
Kinds of Bankruptcy
There are two common kinds of bankruptcy for individuals, Chapter 7 and Chapter 13 bankruptcies. The major difference between them is in the amount of debt that is discharged and what sort of property the debtor is able to keep.
This is also called a "straight bankruptcy" since it eliminates all debt (with the exception of those items mentioned above). Certain property and liens remain in place with the debtor, but all other property is liquidated to pay off the debt. This kind of bankruptcy is available to individuals as long as the court doesn't determine that the filer is trying to abuse the system and it stays on the debtor's credit report for 10 years. However, when the debtor finally emerges from the bankruptcy, he is granted a clean slate.
This kind of bankruptcy, which is not as available as Chapter 7 due to rules regarding income stability and the amount of debt, is a kind of restructuring where the debtor is allowed a combination of lower payments and a longer time to pay while keeping some property to help facilitate income and, therefore, payback. This sort of bankruptcy remains on the debtor's credit report for seven years.
Other Forms of Bankruptcy
If you have more than $1 million in debt, you can file for restructuring like a business under Chapter 11. It stays on your credit report for 10 years. Farmers may file under Chapter 12, which likewise, remains on the debtor's credit for 10 years.
Bankruptcy Is No Picnic
There is something to be said for the filing of bankruptcy before divorce and there are a number of ways to do it, depending on your circumstances. Remember, though, that bankruptcy is not a panacea, it is a tool that may help smooth the path to divorce and afterward. It may make the subsequent months easier to bear, if only just a little.