There is an interesting relationship between bankruptcy and divorce. Divorce is one event that leads many to consider bankruptcy, and financial troubles are one of the leading causes of divorce. While consulting with a bankruptcy attorney about debt relief may not save a marriage, it can relieve couples of one primary source of stress and help position them for the best possible future, together or on their own. These are some basic considerations for individuals contemplating bankruptcy and divorce.
Couples Discount
The Bankruptcy Code allows married couples to file for bankruptcy as individuals or as a joint marital unit. One of the benefits of this option is that both spouses receive bankruptcy relief for about the same amount it would cost a single individual. The bankruptcy courts’ petition fees do not differentiate between single and joint petitions. Additionally, attorneys who charge a flat rate tend not to distinguish between a single and a joint petition. In essence, married couples get a two-for-one discount.
Yours, Mine, and Ours… At Least For Now
Just because you can file jointly does not necessarily mean you should. Another primary consideration for bankruptcy is asset protection. This consideration is not limited to married couples but to anyone suffering from a financial crisis. There are few things more saddening for a bankruptcy attorney than hearing a client has drained their 401k/I.R.A./retirement accounts before they came to the attorney for help. The client likely could have retained these assets after the bankruptcy case concluded. In fact, a list of assets can be protected under federal or state law, and a person’s marital status affects these exemptions.
For instance, a benefit of jointly filing with a spouse is that the federal exemption amounts apply separately to each spouse in the case. This means couples can protect twice the value of the same exemptible property that a single filing individual could protect. An example is the exemption for a debtor’s residence. A single filer can protect up to $31,575.00 in their home’s equity, whereas a married couple can protect up to $63,150.00 in their home.
Conversely, there may be situations where it is best if only one spouse files. If most of the debt is in a single spouse’s name and the assets are jointly owned, then Pennsylvania exemptions would allow the filing spouse to free themselves from the debt, while protecting the joint assets. This approach would also leave the bankruptcy off the non-filer’s credit report.
There may be reasons to wait until after your divorce to file for bankruptcy protection. Eligibility to file for a Chapter 7 is based on the means test, which is determined by family size and household income. The household income is based on both spouses’ income, regardless of whether it is an individual or joint petition. As a result, dual-income households where both spouses earn a decent living can result in a debtor not qualifying for Chapter 7 relief. This situation could result in the Debtor being forced into the more prolonged and costlier Chapter 13 process.
I Have Not Yet Begun to Fight!
Another consideration that individuals should consider is the concept of equitable distribution. This concept is part of the divorce process, where the couple’s assets and liabilities are distributed between the couple. If the couple has filed a joint petition before divorcing and received their discharge, then that debt is one less point of contention. However, individuals should know that bankruptcy does not discharge their obligations under a property settlement agreement in divorce. Bankruptcy cannot be used to avoid paying your ex-spouse.
Is Time On My Side?
One question that most first-time bankruptcy filers want to know is how long the bankruptcy process takes and how soon it can be started. The time it takes to file a petition usually depends on how quickly the client can get their financial documents to their lawyer. The bankruptcy rules allow petitions to be filed without the schedules and supporting documents, but the rules require this missing information to be supplemented quickly. These emergency petitions are usually to stop the immediate sale of the client’s property and are not the ideal approach. This is partially because the information required for preparing the petition and schedules is usually the exact information the lawyer needs to properly advise their clients of all their options.
The duration of the process can vary, but it usually depends on the chapter of the bankruptcy filed. A normal Chapter 7 Bankruptcy can be over in as little as six months. The Chapter 13 bankruptcy requires the debtors to make payments over the course of a bankruptcy plan. These plan payments can take up to five years to complete.
The Fresh Start
The end goal of the bankruptcy process is to give Debtors a fresh start, free from the stress and pressure of their current financial burden. This is how some may view the divorce process as well. As everyone’s situation can be unique, seeking legal advice as early as possible is best. People can avoid losing assets and protecting wealth if they file before divorcing. On the other hand, there are situations where a spouse’s income can limit a client’s options, and waiting until after the divorce could be beneficial. Experienced bankruptcy and family law lawyers can help identify these issues and advise their clients on which options would be most advantageous to them.
Eric Filer is an attorney at KingSpry with over 10 years of bankruptcy experience. He works with some of the Lehigh Valley’s best family law lawyers, and together they can assist with your bankruptcy and family law problems.
