A divorce is a life-changing event that could be overwhelming emotionally and financially. The divorce proceedings will become more complicated when you can no longer pay your debts. In the United States, money issues are significant because of divorce. While divorce is difficult enough, the deep-rooted financial issues that may have led you to the divorce could force you to file for bankruptcy.
Bankruptcy offers some relief to your strained financial life, and as long as you meet the criteria, no one can stop you from filing. However, deciding when to file for bankruptcy and the type of bankruptcy to file when undergoing a divorce is crucial to ensure you do not complicate the situation further. Since each situation of bankruptcy and divorce is different, you and the other party will need to think about it clearly before deciding the correct route to take. If you are currently facing bankruptcy while going through a divorce, it would be best to seek legal counsel.
Bankruptcy During a Divorce
Before choosing to go through bankruptcy while you are already in the middle of a divorce you and the other party must consider the financial and legal issues associated with these processes. Some of the factors that you must consider when deciding to file for bankruptcy when undergoing a divorce include:
The Type of Bankruptcy
The decision to file for bankruptcy during a divorce may significantly depend on the type of bankruptcy you wish to file. Chapter 7 bankruptcy is a liquidation bankruptcy designed to wipe out all your unsecured medical bills and credit card debt. When you file for chapter 7 bankruptcy, the court appoints a bankruptcy trustee in charge of the bankruptcy proceedings. The bankruptcy trustee will sell your property to pay your creditors. When there is no more money to pay your creditors, the remaining debts will be discharged.
Discharge for chapter 7 bankruptcy is often offered after a few months and can be completed before the divorce. When you intend to file for liquidation bankruptcy, the decision to file before or after your divorce will depend on your income and whether or not you maintain a single household with your soon-to-be ex-spouse. When you wish to file a joint bankruptcy, you will have to combine both incomes in the home.
Chapter 7 bankruptcy is designed for individuals with a low income, and you must pass the means test before filing. If you and your spouse's combined income is too high to pass the means test, you may not qualify for liquidation bankruptcy. This could be the case even when your spouse's income is low enough for chapter 7 bankruptcy if they were to do it separately. In the case where your combined income is high, it would be wiser to wait and file for bankruptcy separately after the divorce.
If you are undergoing a divorce and are considering filing for bankruptcy under chapter 13, you may benefit more by waiting to file for bankruptcy after the divorce. Chapter 13 bankruptcy is often available for individuals with a high income who do not qualify for liquidation bankruptcy. The court requires you to make a repayment plan to pay your creditors with this type of bankruptcy. The repayment plan in chapter 13 bankruptcy takes three to five years, meaning that the discharge will not occur until after the divorce.
Another benefit that you may accrue from filing chapter 13 bankruptcy after your divorce is that the issues of child support and alimony can be handled during the drafting process of the repayment plan.
Conflicts of Interest
Sometimes, a couple could delay filing bankruptcy until after the divorce is finalized to avoid potential conflicts of interest. However, since you will handle your incomes after the divorce, your interests may be better handled by a different type of bankruptcy from your ex-spouse. Additionally, it may not be reasonable for couples with high conflict relationships to agree on important issues and what chapter of bankruptcy to file.
Cost Considerations
The collision of divorce and bankruptcy is one of the most complex situations that could arise legally and financially. The high cost of filing for bankruptcy and division of property in divorce could result in severe financial instability. Most people will do anything to avoid bankruptcy, especially in the middle of a divorce. However, paying your creditors becomes a challenge, and you start receiving constant calls to pay the debts.
When deciding when to file for bankruptcy during a divorce, you must consider the costs associated with the process. The cost of filing bankruptcy before, after, or in the middle of a divorce could help you choose the ideal option. For example, filing joint bankruptcy fees is the same as filing individual bankruptcies. Therefore, filing a joint bankruptcy before finalizing the divorce could help reduce filing costs. Also, bankruptcy can simplify property division and help speed up divorce proceedings.
Property Division
Wiping out all your marital debts through bankruptcy can help simplify property division during divorce proceedings. However, before you file for joint bankruptcy, you need to ensure that you can have enough exceptions to protect your property. For example, if you own a lot of property, it would be wiser to file a joint bankruptcy so you can double your exemptions.
If it is not possible to double your exceptions and have more property than you can exempt in a joint bankruptcy, you can opt to file individually after property division in divorce. Also, it is essential to understand that filing for bankruptcy in the middle of a divorce can delay the property division.
Liability Issues
Filing for bankruptcy during a divorce helps to reduce the risk of one spouse shouldering all the liability to the debts owed by both individuals. Often, a bankruptcy enables you to discharge the unsecured debts and creates a reasonable plan for you to pay the secured debts. When all property issues are solved, each spouse will have a burden to bear. A divorce decree does not bind your creditors. Therefore, if all the debts are assigned to you, the creditors will continue to seek payment or even sue you. In this case, declaring bankruptcy before finalizing the divorce would be the wisest idea.
Effects of Bankruptcy on Divorce
Whether you, your spouse, or both of you file for bankruptcy while undergoing a divorce, bankruptcy can slow down the divorce process. Often, California Divorces involve a division of property. When you intend to file for a divorce, all your property must be placed under individual or community property. The marital property is often divided between the two of you.
When you file for bankruptcy during a divorce, both your property will be frozen until the divorce process is finished. When bankruptcy proceedings are underway, divorce-related property division cannot occur. The bankruptcy estate encompasses the marital property from which the non-dischargeable debts are paid. Once your property is liquidated in chapter 7 bankruptcy or you create a repayment plan under chapter 13, the divorce court will divide the remaining marital property.
In a divorce, the debts you owe are considered negative marital property. When your spouse files for bankruptcy, the court will only discharge part of their debt, and the creditors can sue you for your part. Many people choose to file for bankruptcy jointly to reduce the possibility of full responsibility for joint debts in bankruptcy. If your soon-to-be ex-spouse is trying to shift the debt to you, you may be able to file for bankruptcy even if your spouse filed separately.
Sometimes, a creditor can come for the total value of your marital property unless both parties file for bankruptcy. In this case, they can only claim half of the property belonging to the spouse who did not file for bankruptcy. When you are dealing with the thorny financial details that come up from divorce and bankruptcy, you will require the guidance of a skilled bankruptcy Attorney.
How does Bankruptcy Help Avoid Foreclosure Resulting from a Divorce?
Foreclosure begins when a homeowner falls behind with their mortgage payments. Before selling or auctioning the property, the lender must follow the right procedure under the State laws. Fortunately, declaring bankruptcy could save your home. Usually, the lender cannot begin the foreclosure until you have missed three to four payments
It is common for individuals who have gone through a divorce or are in the middle of filing one to be unable to pay their mortgage and end up in foreclosure. Even when your foreclosure is in progress, filing for bankruptcy under Chapter 13 or Chapter 7 could help stop it. Filing for bankruptcy will give you an automatic stay which buys you more time to move or decide what to do. Under Chapter 7 bankruptcy the sale of your property is postponed until the bankruptcy proceedings end.
Chapter 13 bankruptcy on the other hand may help you restructure your mortgage and create a plan to pay it off without the need to lose your home. Finally, you can use the extra time bought by the automatic stay to sell the property, recover your money and pay the debts. Although you are likely to sell the property at a price lower than its market value, it will be better than losing it all in foreclosure.
Can bankruptcy protect me from the Requirement to pay my Spouse's Attorney Fees?
In many divorce situations in California, the court may order one spouse to cover the other spouse's attorney fees. Divorce lawyers often charge as much as ten thousand dollars to represent a client in divorce proceedings. If your spouse cannot cover the expenses for their legal representation, the court may order you to cover the fees for both attorneys. You can list the lawyer fees as a dischargeable debt when filing for bankruptcy. However, your ex-spouse can challenge that action forcing you into a court hearing to help resolve the issue.
The judge determines whether attorney fees are support or property settlement. If you list the attorney fees debt when filing for bankruptcy and your spouse does not contest, the obligation will be eliminated.
Joint Secured and Unsecured Debts in a Bankruptcy Coupled with Divorce
If you and your ex-spouse owe joint debts, they will be included in your bankruptcy proceedings. When you file for bankruptcy individually during or after a divorce, your ex-spouse will be notified of the bankruptcy since they are a joint debtor. In chapter 7 bankruptcy, you can discharge most of your debts. Some of the unsecured debts you can eliminate after a liquidation bankruptcy are credit card bills, medical bills, old tax debts, old utility and rent payments.
When you file for bankruptcy under chapter 13, your unsecured creditors will receive a portion of their debt. The amount recovered by each creditor will depend on your income, debts, and expenses. In a chapter 13 bankruptcy, the court will discharge the remaining unsecured debts. It is essential to understand that your bankruptcy will not discharge your ex-spouse's legal liability for the unsecured debts. If you wed the unsecured debts together, the creditor has a right to sue the other spouse if they are not declaring bankruptcy.
If a divorce decree states that you have an obligation to certain debts, they can affect your bankruptcy. When you combine divorce proceedings with bankruptcy, the bankruptcy will not eliminate your liability to the family court order. Even when you are released from the debt through bankruptcy, you could be liable for the debt through a divorce.
When meeting with your bankruptcy attorney, it would be wise to carry along the order from divorce court. Also, you should carry the documents on your joint debts with your ex-spouse. In this case, your bankruptcy attorney will liaise with the divorce lawyer to figure out the best strategy for debt relief.
If you owe a debt secured using property or a vehicle, you must continue to pay your creditors if you want to retain ownership of the property. There are limited instances where you can pay a sum equal to the value of your property. For example, as part of your property division agreement in divorce, you could be ordered to continue paying your mortgage or car loan. Like unsecured debts, bankruptcy can release you from the debt but still be held by family court proceedings.
Divorce-Related Debts that cannot be Discharged through Bankruptcy
If you choose to eliminate your debts using chapter 7 bankruptcy while undergoing a divorce, it is crucial to understand that not all debts are dischargeable. While you can eliminate your credit card debts and medical bills debts, you must continue to pay alimony and child support even after declaring bankruptcy.
The ability to support two households after a divorce may be a huge concern for your financial life. Alimony is the amount of money that one spouse must pay to the other after a divorce. The amount you need to pay or receive from your spouse may vary depending on the financial status and the number of years you were married.
Alimony can be temporary or permanent depending on the dependent spouse's ability to find a job and continue to support their needs. If the marriage was for a long time or the dependent spouse could not support themselves completely, the court could order permanent spousal support. When you file for bankruptcy after a divorce, you must understand that you cannot eliminate your obligation to pay spousal support.
After the dissolution of a marriage where children are involved, the issues of custody will come up. Often the parent who does not have custody of the children may be required to pay child support for children under the age of eighteen years. Even when you file for bankruptcy, the Requirement to pay child support from the family court will not be lifted. However, if your financial circumstances have changed as a result of the divorce, you can request for the court to modify your child support payments.
Find a Los Angeles Bankruptcy Attorney Near Me
When a marriage fails and the couple decides to undergo a divorce, the involved parties may have a lot on their minds, including legal, financial, and emotional issues. Often divorce is one of the leading causes of filing for bankruptcy among married couples in the United States. Due to the property divisions and financial matters associated with divorce, you might find yourself in a situation where you cannot pay your debts. Filing for bankruptcy allows you to eliminate your debt or give you time to reorganize your finances.
If you consider filing for bankruptcy in the course of a divorce, your situation may become more complicated. That is why you cannot afford to file for bankruptcy during divorce without consulting with a skilled bankruptcy attorney. Many pitfalls can arise when divorce and bankruptcy collide, and only a knowledgeable attorney can help you avoid them. At Los Angeles Bankruptcy Lawyer, we will offer you the much-needed legal guidance and representation in your bankruptcy case to ensure the best outcome. Call us today at 424-285-5525 to discuss more details of your situation.
