Bankruptcy & Divorce: How the Two Are Connected

Differences in spending habits and money disagreements are one of the top reasons people file for divorce. And for many people, divorce is one of the main reasons they end up filing for bankruptcy, oftentimes due to the additional expenses such as child support, alimony and now having to maintain a household on a single income. While both predicaments can be emotionally, and financially challenging, proper planning can help make the process less complicated and more cost effective.

Factors Considered

Whether you file for divorce or bankruptcy first depends on several factors, including the following:

Type of Bankruptcy Being Filed

It first depends on what type of bankruptcy you are filing, whether it be a Chapter 7 or Chapter 13 bankruptcy. If the couple wishes to file for Chapter 7 together, both incomes will be used when determining whether they qualify. Two incomes can often mean that the couple will not be eligible for Chapter 7 after taking the Means Test, which can often lead many couples to go through the divorce first and then each file for Chapter 7 individually. However, if timing is an issue, it should be kept in mind that a Chapter 7 bankruptcy case takes less time than a Chapter 13 case. For instance, a Chapter 7 case may be finalized in as little as three months, while a Chapter 13 case can take three to five years.

What Exemptions Will Be Used?

In any bankruptcy case, you can try to keep certain property throughout the proceedings by using exemptions that are available. When the case begins, you will need to declare all your property, including both exempt and non-exempt. Property that falls in the exempt category can be kept after the bankruptcy case is finalized. Florida happens to have one of the more generous homestead exemptions in the country. In addition, many states allow couples who file jointly to double the amount of exemptions used, so this can be a plus to filing jointly. A bankruptcy attorney can help advise you on what works best for your situation.

Understanding State Laws for Property and Asset Division

In terms of debt, being strategic about when you file for bankruptcy or divorce first can be very helpful if you have a great deal of marital debt. The problem is a divorce decree, even if the debt is divided between a couple, does not mean that the creditor will recognize the division of debt. This means that both spouses are on the hook for the debt in their eyes. For this reason, filing for bankruptcy first can be helpful in discharging all unsecured debt obligations the couple may have, which makes dividing up property and debt in the end for the divorce case much easier.

Saving on Filing Fees

One benefit to filing for bankruptcy jointly instead of separately can be the costs saved on legal fees. The average cost for filing a Chapter 7 case can end up being around $1,500, and the problem is, it costs the same no matter whether you file jointly or separately. For a Chapter 13 case, the fees can be anywhere from $2,000 to $3,000, depending on the complexity of the case. If a married couple files together, they are saving themselves on the costs of filing separately. You do not need to still be living together to qualify for filing jointly either. If costs are a big concern, this can be a major benefit to filing jointly.

If you have questions on this topic or are struggling with insurmountable debt, we advise sitting down with an experienced  Orlando bankruptcy attorney for a free consultation- particularly if you are facing wage garnishment or have a collection lawsuit pending. A bankruptcy attorney can advise you as to all the options available to you and detail the pros and cons of each, giving you the best advise based on years of experience helping those in similar financial circumstances.