It’s not at all uncommon for either or both spouses to file for bankruptcy following a divorce. It could be that issues in the marriage led to financial problems. Or perhaps financial strains added to marital issues. Either way, the two often go hand-in-hand. If you are thinking of filing for bankruptcy after a divorce, there are several things you should keep in mind.
Things to look for in your divorce decree
First, if your divorce is complete you should review your official divorce decree for information. Additionally, even though the divorce decree is not filed with the court, your case trustee will request a copy of it before your 341 meeting, which happens approximately 30 days after the case is filed.
Allocation of debts
You’ll want to look at the allocation of debts in particular. Did you agree to split all debts equally? Are certain debts assigned to only one party? Make certain that you list all debts in your paperwork, even if some were assigned in the divorce to your spouse. In that case, check if the divorce decree includes an indemnification clause. This means that one spouse is agreeing to make the other spouse whole if they suffer losses from a joint debt. For example, in a divorce decree, one spouse might agree to take on a joint car loan and indemnify the other spouse from any losses. This is an agreement between spouses, however, and third parties are not held to it. So, if in our example one spouse gets behind on car payments, the car lender could still sue both spouses to collect the money. If spouse two is made to pay the debt, they can then sue spouse one under the indemnification clause to recoup the money. If you have an indemnification clause in your divorce decree, consider speaking to a knowledgeable bankruptcy attorney in your area to make sure bankruptcy can give you the relief you’re looking for.
List of Assets
With any bankruptcy filing, you are required to include a detailed listing of all of your assets in your official paperwork. You will be signing under penalty of perjury that all of the information contained in your bankruptcy paperwork is true and accurate to the best of your knowledge, so it’s important to disclose everything. Part of the bankruptcy process will involve a bankruptcy trustee reviewing your paperwork and documents to ensure that everything is correct. The Trustee will want to review your divorce decree and check that division of property against the assets you are listing.
Debts from divorce
Some debts from a divorce proceeding can be eliminated in your bankruptcy. If you are unable to afford your divorce attorney fees, those can be included and discharged at the end of your case. Property settlements, however, are not as straightforward and depend on the type of bankruptcy you file. If you file Chapter 7 (or “liquidation”) bankruptcy then any money you owe your spouse from the property settlement is not a dischargeable debt. You will still owe that money after your bankruptcy is complete. If you file for Chapter 13 bankruptcy, however, you can include money owed to your ex-spouse as part of the property settlement as an unsecured debt, which will be discharged at the end of your Chapter 13 repayment plan.↑ Back to top
Pros and cons of filing bankruptcy while a divorce is pending
If your divorce is not yet final, it may make sense to address debt relief and file for bankruptcy before divorcing. There are pros and cons to this, and it’s important to consider all of them carefully. First, as soon as you file a bankruptcy case something called the automatic stay goes into effect. This stops any other court proceeding from continuing until the bankruptcy is complete. The automatic stay does not stop the court from creating or enforcing any support payments. It does, however, include all other aspects of divorce cases and can cause a significant delay in completing that proceeding, so it’s important to consider your priorities.
If, however, you have a decent relationship with your soon to be ex, there can be several benefits to addressing your financial situation before your divorce in a joint bankruptcy. First, you can save on court fees by only filing one case, which will save on attorney fees as well as administrative fees from the court. Second, you will be able to discharge some (or all) of your unsecured marital debt, like credit cards and medical bills so that you can both get a fresh start. This can be key because marital debt refers to debts incurred during the period of the marriage and having no marital debt to deal with makes any settlement agreement more straightforward. Finally, you might be able to protect more property by filing together instead of filing individually. You can protect property in bankruptcy by using exemptions. Many states will allow a married couple filing jointly to double most of the exemptions which can result in more property being protected overall. If you decide to work with a bankruptcy attorney, you can and should get their legal advice for the order of legal proceedings.↑ Back to top
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How to file bankruptcy after a divorce
Let’s take a look now at how to file bankruptcy after a divorce. This will supplement our guide on how to file Chapter 7 bankruptcy and highlight what to look out for as you’re preparing to file.
❗❗ The forms ask if the person filing for bankruptcy is married and to include information about a spouse. After someone is divorced they no longer have a spouse unless they were remarried. If you have not remarried, the correct answer to the question of "are you married" is "no" even though you were married in the past.❗❗↑ Back to top
Dealing with your car
If you have a car it is very important to make sure to properly list the vehicle(s) in your schedules. In Chapter 7 you’ll have a few different options regarding what to do with your car. If you want to keep the car and you are current on payments (if any) you can indicate that you intend to continue with payments. The creditor will likely request that you sign a reaffirmation agreement. If, however, you are a co-signer on a car that was awarded to your ex-spouse in the divorce, most filers don’t reaffirm the debt to take advantage of the opportunity to walk away from the obligation.
If you believe the car is worth less than what you owe, you can explore the option to redeem the car. If you plan to keep the car it’s also important to properly list the car in your exemptions schedule to protect the equity. If, however, you are behind on the payments without any hope of catching up, you do have the opportunity to surrender the car in your bankruptcy, which will relieve you of the obligation to keep making payments as well as any deficiency in your payments, late charge, etc. If your ex-spouse co-signed for the car loan, they will continue to be obligated to pay the debt.↑ Back to top
Bankruptcy exemptions allow you to protect both real and personal property, up to a certain value. Filers are usually able to avoid giving up most, if not all of their property by the proper use of exemptions. In many states, you have the opportunity to choose whether you would like to follow the federal bankruptcy exemptions or state exemptions. Married couples are often able to double the exemptions claimed for personal property. If one of you has already moved out of the marital home that could impact your ability to take the homestead exemption.↑ Back to top
Whether you declare bankruptcy before, during or after a divorce truly depends on your circumstances. The decisions that you make about when to file bankruptcy and whether to do so as a couple before divorce are highly personal. It is about what is best for you in your current reality, and there is no right or wrong answer. If it’s possible, however, to work with your soon-to-be ex-spouse and file a Chapter 7 case before moving forward with the divorce, that can greatly simplify the property division and overall divorce proceedings.↑ Back to top