People who have secured debts like a mortgage or car loan can file Chapter 13 to catch up on past payments and keep their property. If you’re getting divorced and you plan to file Chapter 13, you’ll want to consider the timing of your bankruptcy filing. Many people find that it's best to file Chapter 13 after their divorce is final. This article explains the pros and cons of filing before, during, or after a divorce.
Written by Attorney Paige Hooper.
Updated March 10, 2022
Debt and divorce often go hand-in-hand. Sometimes, debt struggles during a marriage lead to divorce. Other times, the financial strain of separating and the costs of the divorce itself drive one or both spouses into debt. In either case, it’s not uncommon for a married couple that’s divorcing to consider filing Chapter 13 bankruptcy to get debt relief. This article briefly summarizes how Chapter 13 works and covers the potential benefits and drawbacks of filing Chapter 13 bankruptcy before, during, or after your divorce.
How Chapter 13 Bankruptcy Works
Chapter 13 helps people who’ve fallen behind on paying their secured debts, such as a mortgage or car loan. If you’re behind on your mortgage, Chapter 13 gives you a chance to catch up on your payments without losing your home. The total amount you’re behind, called the arrearage, freezes on the time of your bankruptcy filing. Each month, you make your ordinary house payment, plus a little bit on the arrearage, until you’re current again. You make these payments through your Chapter 13 repayment plan.
Chapter 13 gives the bankruptcy court broad powers to modify the terms of your car loan. In your repayment plan, you pay either what you owe or what your car is worth, whichever is less, usually at a reduced interest rate. The payments are spread out over your entire plan term, which can last from 36 to 60 months. You can also use Chapter 13 to walk away from unaffordable debts or get out of unfavorable leases or contracts.
There is no liquidation in Chapter 13. If you have any non-exempt equity in property, you can still keep the property. In this case, you must pay your unsecured creditors an amount equal to the value of that non-exempt equity. You don’t have to pay it all at once, though. The payments are spread out over your full 3-to-5-year plan term. Chapter 13 is also available to debtors who don’t pass the means test and thus don’t qualify for Chapter 7. You may not pass the means test if your disposable income is too high.
Chapter 13 vs. Chapter 7
Chapter 7 helps debtors who are saddled with large unsecured debts, such as credit cards or medical bills, that they’d probably never be able to pay off otherwise. Chapter 7 eliminates all or most of your unsecured debts. Unlike Chapter 13 bankruptcies, most Chapter 7 cases take only a few months from start to finish.
Chapter 7 won’t help you if you’re behind on your secured debt payments. In Chapter 7, your payments must be current if you want to keep your house or car. Unlike Chapter 13, Chapter 7 doesn’t give the court the power to alter your interest rates or loan balances. In a Chapter 7 case, the bankruptcy trustee can liquidate the non-exempt assets in your bankruptcy estate to pay your creditors. But most people who file Chapter 7 bankruptcy can use exemptions to cover all their assets. Some debts can’t be discharged in Chapter 7 or Chapter 13. Non-dischargeable debts include support obligations like child support or alimony required by a court order.
Filing Chapter 13 Bankruptcy Before You File For Divorce
If you’re on the brink of divorce, filing a Chapter 13 bankruptcy petition beforehand is probably a bad idea. If you and your spouse file Chapter 13 jointly, would you be able to remain married for the 3-5 years a Chapter 13 plan takes to complete? Filing for divorce while you have an ongoing Chapter 13 bankruptcy will cause problems for your bankruptcy and your divorce case. On the divorce side, the pending bankruptcy will limit what the divorce court can do and your divorce will move more slowly and be more expensive.
On the bankruptcy side, if you and your spouse filed jointly, one or both of you will need a new bankruptcy attorney. Once the divorce is filed, the two of you no longer have shared financial interests, and conflict of interest rules prevent the same bankruptcy lawyer from representing two clients with conflicting interests. A joint Chapter 13 case can be divided into two separate cases, but the process is a lot of work, requires additional fees, and usually results in at least one of the separate bankruptcies getting dismissed.
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Filing Chapter 13 Bankruptcy While Your Divorce Is Pending
If you file Chapter 13 bankruptcy while your divorce is pending, the Bankruptcy Code’s automatic stay provision will stop the divorce proceedings for the next 3-5 years. This could be a benefit or drawback depending on your situation. Note that the automatic stay won’t stop the divorce court from entering or enforcing child support or spousal support orders while the bankruptcy is active.
Filing Chapter 13 Jointly With Your Spouse
Even while your divorce is pending, you’re still legally married until the divorce is final. That means that you could still file a joint Chapter 13 case. While this is technically an option, you and your spouse would need to have an excellent relationship for the next 3-5 years to make it work. If you can work together, there are some potential benefits.
First, bankruptcy can wipe out some or all your marital debt. If you own property that neither of you wants to keep, like a house or car, you can walk away from the mortgage or car loan without having to sell the house or car or deal with dividing that property. Handling your debts through bankruptcy will likely make your divorce process easier and cheaper.
You can include alimony and child support payments in your Chapter 13 plan, which helps ensure they get paid. The two of you don’t have to divide the plan payments equally, so you can split the payments in a way that makes sense for your situation. But, neither of you can sell assets or incur new debts while the bankruptcy is pending, which can be difficult if you’ve already separated. Also, if one of you stops paying your plan payments, the entire case could get dismissed.
Filing Chapter 13 Without Your Spouse
Completing a joint bankruptcy while your divorce is pending isn’t impossible, but it would be very difficult. That said, filing Chapter 13 bankruptcy without your spouse while your divorce is pending is probably an even worse idea. Until your divorce is final, you’re still married, which means you must include your spouse’s income and expenses in your bankruptcy paperwork, which could lead to a longer payment plan term or higher plan payment than you’d have otherwise.
Your divorce proceedings will stall for 3-5 years. During that time, if you’ve filed Chapter 13, you can’t sell assets or incur any new debt, but your spouse can (subject to limits from the divorce court). If you’re not filing jointly, there are no real benefits to filing a Chapter 13 case while your divorce is pending, with two exceptions:
Filing Chapter 13 Bankruptcy After Your Divorce Is Final
If you’re considering filing Chapter 13 bankruptcy, it usually makes the most sense to do so after your divorce is final. After your divorce is final, you don’t have to worry about working with your ex-spouse, and you don’t need to include their income or expenses in your bankruptcy forms. Your property and debts have already been divided in your divorce decree, so you know exactly which assets you own and which debts you need to deal with.
You can use your Chapter 13 case to eliminate your legal responsibility for any joint debts you shared with your former spouse. Use caution when doing this, though. When you discharge your liability for a joint debt, the creditor will collect the whole debt from the other co-signer — your former spouse. If your divorce decree ordered you to pay this debt, you must still pay it, even if you’re not legally obligated. If you don’t, you’ll be in contempt of the divorce court. If your divorce decree contains an indemnification clause, your ex-spouse can sue you for the amount of the debt.
Finally, if you file bankruptcy before your divorce is final, you can’t include debts that you incurred because of the divorce, such as attorney fees you owe to your divorce lawyer or debt you owe to your ex-spouse as part of a property settlement. A property-settlement debt might look like this: You’re awarded the house in your divorce, and you’re ordered to pay your ex-spouse a certain amount to buy out their share of the equity. Debt that arises from a property settlement can only be discharged in Chapter 13 bankruptcy. It’s not dischargeable in a Chapter 7 case.
Bankruptcy can help you get a fresh start, but Chapter 13 bankruptcy works differently and serves a different purpose than Chapter 7 bankruptcy. If you’re preparing for or currently going through a divorce, Chapter 13 bankruptcy may or may not be a good choice for you. A Chapter 13 bankruptcy case could have a very different outcome depending on whether you file before, during, or after your divorce. For most people, Chapter 13 bankruptcy makes the most sense and is most likely to succeed if you wait until after your divorce is final. You can schedule a free consultation with a bankruptcy lawyer to get legal advice specific to your situation.