The Spider’s Web of Divorce and Bankruptcy

Quite often, divorce and money troubles go hand in hand. For some couples, severe money issues can lead to divorce. For others, the divorce is what causes the money issues (for at least one spouse, if not both). When those money issues become severe enough to lead to bankruptcy for one or both of you, the timing of the bankruptcy and the timing of the divorce can have profound effects on one another. Sometimes, this can work out to your benefit, but more often than not, it’s a problem you have to navigate very carefully.

Who Needs to Apply?
The first question is simple: who needs the bankruptcy? It may be that both spouses are already bankrupt. It may very well be that one spouse believes the divorce process will leave only them bankrupt. In some cases, neither spouse is bankrupt now, but neither can really afford the increased costs that come with maintaining separate households. In any case, the question of who needs to apply in the first place affects all of the other aspects below.

Chapter Won?
The second major question is which form of bankruptcy you’re applying for. If you’re dealing with a personal bankruptcy, you have chapter 7 and chapter 13. Chapter 7 bankruptcies are generally over within a few months; chapter 13 takes years to resolve. The key here is that division of property is impossible during the execution of a bankruptcy, so if you know you intend to divorce, waiting to file for Chapter 13 until after the divorce is over is wise. If you’re filing for Chapter 7 and divorce, you can go in either order, as both take about the same amount of time to complete.

Income and Outgo
Another factor to take into account is the effects that bankruptcy and divorce have on your income, and the dependency that each one has on your income. For example, getting divorced may well drive your income and asset pool low enough that you can qualify for Chapter 7 after divorce, when you wouldn’t have beforehand. On the other hand, if both you and your spouse need to file, filing jointly before you divorce can save quite a bit in legal costs and (in some jurisdictions) provide you with a greater asset protection limit than the two of you would get individually.

Relationship Status
Of course, if your relationship with your spouse is hostile, filing jointly with them for any kind of bankruptcy is a minefield. The process of joint bankruptcy depends quite a bit on both spouses working together to present an accurate story, and it offers a vindictive soon-to-be-ex ample opportunities to make life all kinds of difficult for you. So unless you expect a civil and amicable divorce in the first place, filing for bankruptcy before you file for divorce can be a huge mistake.

Get Two Lawyers
No, not one lawyer for each of you — though that is usually a good idea, too — I mean get both a bankruptcy attorney and a family attorney. Get them both in the same room, and get them talking to each other, and to you and (if available) your spouse about what exactly your options are and how you can put your best foot forward.

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We focus exclusively on family law matters so we are always available to answer your questions and help.

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