So you are getting divorced, and you have both individual and joint debt you need to deal with in order to set up new individual households. Here are three practical tips with examples to help you move past this and into your new life, debt-free.
You deserve a fresh start, and whether you agree or not, so does your ex. If it is possible for you two to cooperate, filing a bankruptcy petition jointly will wipe out your jointly-owned unsecured debt, and will allow you to deal with any joint secured debt together.
For example, let’s say John and Mary own a house together. They are underwater on the mortgage, and neither can afford to keep the house after the divorce and must live on their separate incomes.
John has student loans and $20,000 in credit card debt. Mary has $12,000 in medical bills and $3500 in credit card debt. They have a joint credit card with a balance of $6,000.
John and Mary know they will eventually divorce, but for practical reasons agree to wait and file a Chapter 7 bankruptcy case first. In their filing, they disclose that they live separately and are about to divorce, and set forth both their individual and joint income, expenses, assets, and debts.
In their filing, John and Mary legally “surrender” the marital property and have the underlying debt discharged as unsecured. All of their credit card debt and Mary’s medical debt is discharged as unsecured. John will have to pay his student loan debt because that is discharged in bankruptcy only very rarely, and only in a Chapter 13 filing.
A Chapter 7 filing usually concludes within 4-6 months of filing, so with a short delay, John and Mary get a fresh financial start and can now begin divorce proceedings and move on.
First, know that if you file a bankruptcy petition while you are in divorce proceedings, the divorce will halt for the duration of your bankruptcy case due to the automatic stay. It could also complicate the process of crafting a property settlement agreement. Moreover, if after your bankruptcy case the family law judge finds that you are responsible for some of your ex’s debt, you will have to pay it despite your discharge.
If you wish to avoid delaying the divorce and want the property settlement process to be straightforward, you will wait until divorce proceedings are complete and then file a Chapter 7 bankruptcy petition. Any individual and joint unsecured debt will be discharged as long as it is not “in the nature of support” pursuant to your property settlement agreement. You will also be discharged from any joint secured debt if you surrender the underlying collateral.
The problem here is, your ex will remain liable on any joint debt you had discharged, and the creditors will inevitably pursue him or her to collect that. A jointly-owned car might be repossessed, for example, or wages garnished in an effort to collect a joint debt. Things like this will likely cause some hard feelings between you, and if you have children together it might affect your ability to co-parent effectively.
This being said, if you have debt you must deal with and your ex is not cooperative, you must do what you have to do.
For example, let’s say that instead of working with Mary and filing a joint petition prior to their divorce, John decides to file a bankruptcy petition on his own. He is discharged from his individual credit card debt, discharged of his responsibility for the joint debt, and discharged of his responsibility for paying the mortgage because he surrendered the marital home in his filing.
This leaves Mary on the hook for the house and the joint credit card debt. If John filed prior to their divorce, a family law judge could take this into consideration when crafting the property settlement agreement, and John could end up paying some of that discharged debt anyhow. Thereafter the mortgage lender would likely institute foreclosure proceedings if Mary cannot afford to refinance and have a mortgage in her name. This could force Mary into filing her own Chapter 7 after divorce.
Tip #3 – If Filing Bankruptcy Jointly, File Before You Begin Divorce Proceedings. If Filing Bankruptcy Individually, File After the Divorce is Final.
Tip #3 is a general rule of thumb – you should consult with your bankruptcy attorney about the facts of your particular situation before making any decisions.
As you read in the examples above, working together to settle finances prior to divorce is the more efficient and fair way to move on financially. However, if cooperation is not possible, filing bankruptcy after the divorce is final is a way to get all of your debt except payments “in the nature of support” discharged.
What happens when a spouse files bankruptcy during the divorce? Filing bankruptcy and divorce at the same time does not usually make sense, as the bankruptcy stays (delays) your divorce and greatly complicates the property settlement process. If it is at all possible to work with your ex, consider filing bankruptcy jointly prior to instituting divorce proceedings. It will prevent an already messy situation from becoming much messier.
About the Author
Veronica Baxter is a blogger and legal assistant living and working in the great city of Philadelphia. She frequently works with David M. Offen, Esq., a busy bankruptcy attorney in Philadelphia.