Why filing Chapter 13 bankruptcy while getting a divorce is probably a bad idea

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Written by Alexander Hernandez, Esq.  
Updated February 14, 2020

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Unfortunately, divorce and bankruptcy can go hand-in-hand at times, so it’s important to know how a divorce affects a bankruptcy case. If you’re considering divorcing your spouse and are thinking about addressing your debts through a Chapter 7 bankruptcy or a Chapter 13 bankruptcy, continue reading.

Chapter 7 Bankruptcy

Whether you or your spouse can file for bankruptcy depends on several factors. To qualify for a Chapter 7 bankruptcy, your income must be below a certain level to pass the Means Test. If you pass the Means Test and you don’t have a lot of disposable income available, then you can file for a Chapter 7 bankruptcy. Chapter 7 is a good choice when there is unsecured debt like credit cards and you have limited assets that are exempt (protected). Depending on where you live, you’re entitled to either state or federal bankruptcy exemptions. The amount not protected is known as non-exempt and that is the amount the bankruptcy trustee will pay to your unsecured creditors as part of the bankruptcy process. For example, if your personal property is worth $5,000 and the bankruptcy exemption in your state is $1,000, the non-exempt equity is $4,000. If you can’t afford to pay the trustee the non-exempt equity, then the trustee has the authority to take that asset, sell it, and disburse any money left over to creditors. If you want to keep the asset and can afford a repayment plan, then continue reading to learn about a Chapter 13 bankruptcy.

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Chapter 13 Bankruptcy

With a Chapter 13 bankruptcy, you may be able to keep personal property or assets that would have been lost with a Chapter 7 bankruptcy. Since a Chapter 13 payment plan lasts between 36 to 60-months with the bankruptcy court, you have more time to pay back the value of the non-exempt equity of your personal property. While a bankruptcy trustee may provide a monthly payment plan in a Chapter 7 case as well, it’s usually between 10 to 12 months (or less) and sometimes requires a lump-sum payment. 

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Filing Chapter 13 bankruptcy before divorce

While filing bankruptcy will give you a fresh start, certain factors should be considered, especially if it looks like a divorce may be in your future. 

Because a Chapter 13 bankruptcy is a minimum of a 3-year commitment, it may not be in your family’s best interest to file a joint case if you’re planning on filing for divorce. Not only would it be difficult to stay married for another 3 to 5 years, but the divorce case will affect your bankruptcy case. For example, personal expenses will increase since you and your spouse are living in separate households, making the Chapter 13 payment plan unaffordable. As a result, if your case gets dismissed, you may end up in a worse situation. Also, because of the attorney-client relationship, with a joint bankruptcy filing, you may need to get another bankruptcy attorney to avoid a conflict of interest.

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Divorce during Chapter 13 bankruptcy

If a Chapter 13 bankruptcy has already been filed, getting divorced during the bankruptcy proceedings will also affect your case.

For example, if you own a home, whether you’re filing for Chapter 13 or Chapter 7, a divorce may affect any equity you have in your home. Equity is the difference between the value of your house minus what you owe. Depending on the state you live in, some or all of the equity in your home may be protected as a married couple. However, if you move out of the marital home or file for divorce during the bankruptcy, that bankruptcy exemption may be lost. If the marital home is going to be sold, your share of the equity after the sale of your home is complete is likely not protected. The bankruptcy trustee will use the money to pay back your creditors.

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Filing for bankruptcy after divorce

Whether filing for Chapter 13 or Chapter 7, joint income must be included in the Means Test calculation. You may have not qualified for a Chapter 7 bankruptcy because both incomes combined were too high for the Means Test. However, if divorced, your ex-spouse’s income isn’t used when calculating the Means Test. If you pass the Means Test, you can proceed with a Chapter 7 bankruptcy instead of Chapter 13. However, if you’re receiving alimony or spousal support, those payments are considered income and will be included in the Means Test as well as Schedule I of the bankruptcy forms whether you’re filing a Chapter 13 or Chapter 7 bankruptcy. If you receive child support, those payments are included in Schedule I for both types of bankruptcy.

Another reason to file bankruptcy after the divorce is granted is that you may have gotten into more debt  because of the divorce. Timing is always important when it comes to bankruptcy. Therefore, any debts you incurred after you receive your bankruptcy discharge can’t be included, so it’s to your advantage financially to wait and prepare accordingly.

Even though it’s to your benefit to file bankruptcy after the completion of your divorce case, not all debts are dischargeable with bankruptcy. For example, alimony and child support are considered Domestic Support Obligations which can’t be discharged in bankruptcy. Attorney fees related to alimony and child support can’t be discharged either, but other types of attorney fees can. Therefore, if as a result of your family court case there are attorney fees due, you could include a portion of those fees in the bankruptcy. You can also eliminate debts like car loans, repossessions, medical bills, and other joint debt.

Before filing for bankruptcy, make sure to review your credit report for any mistakes that may impact your credit score. Sometimes credit card companies make the mistake of listing your spouse’s debt as your own. Nevertheless, even if you believe your spouse is responsible for the debt, list that debt(s) in your bankruptcy forms anyway.

To determine if you should file a joint bankruptcy when it comes to filing a Chapter 7 bankruptcy versus a Chapter 13, consult with a bankruptcy attorney.

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Conclusion 

The bankruptcy process can be complicated, but at Upsolve, we’re here to help you for free if you need to file for bankruptcy. Even if you don’t qualify for our free service or still want to speak with a lawyer, we can refer you to a bankruptcy attorney for a free consultation so you can get the legal advice you need to make the right choice. Our website even has hundreds of articles on other debt-relief options if you chose to not file for bankruptcy.

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Upsolve is a 501(c)(3) nonprofit that started in 2016. Our mission is to help low-income families who cannot afford lawyers file bankruptcy for free, using an online web app. Spun out of Harvard Law School, our team includes lawyers, engineers, and judges. We have world-class funders that include the U.S. government, former Google CEO Eric Schmidt, and leading foundations. It's one of the greatest civil rights injustices of our time that low-income families can’t access their basic rights when they can’t afford to pay for help. Combining direct services and advocacy, we’re fighting this injustice.

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