Divorce and Bankruptcy: When families are facing both, which should come first?
In this time of economic downturn, I am seeing quite a few people filing for divorce who have substantial debt problems, and many are considering, or needing, to file for bankruptcy. This is especially true considering that a large number of those considering divorce are doing so because of financial struggles. In this event, careful planning is required and each individual situation must be examined thoroughly. Below are some points to consider, not intended to advocate bankruptcy by any means, but just for general information on a situation that is very common.
If you can avoid bankruptcy, that is the best option. However, if required, it may be better to file bankruptcy before the divorce, considering:
- Missouri and Federal bankruptcy law will allow married couples to file jointly, eliminating the need for two separate bankruptcy filings and two separate attorney fees after the divorce.
- The parties can exempt (protect) double the amount of property if they file jointly
- Most married couples have joint debt. Even though the divorce court can divide the debt, it cannot alter the contract with the creditor, meaning that if the spouse ordered to pay doesn’t, creditors are going to come after whoever’s name is on the account. Then the only remedy is a contempt of court proceeding, which is time consuming (up to a year) and costly. All the while, the other spouse has to make the payment or suffer the credit consequences. Joint bankruptcy can eliminate the debt all together and avoid the problem of who pays who.
- Joint filing before the divorce will eliminate the need to litigate issue of debt in the divorce, which reduces the time and expense of the divorce, and avoids the result described above. Remember, a divorce decree is just a piece of paper, enforcing it is a whole different matter.
- Although the bankruptcy law will not allow a divorcee to discharge debts ordered in the divorce, the problem of collection and contempt may cause greater credit problems than the bankruptcy itself.
- Joint filing before divorce will allow for a higher income threshold for Chapter 7 qualification (means test avoidance)
- Joint filers can utilize Missouri’s double wild card exemption and the head of household exemptions with child exemptions (which can be significant).
- It most likely (almost guaranteed) that you can rebuild and re-establish your credit much faster than you could ever have paid off the debt, while at the same time getting the past problems behind you and truly getting a “fresh start”.
- Bankruptcy is not the end of the world. It can be an effective solution to a real problem that real people have during these times.
Please note that this list is not complete, and other issues may affect the analysis or timing of the filing. Seek legal advice for your particular situation.