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Divorce or Bankruptcy Which Should Come First?

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  • Divorce or Bankruptcy Which Should Come First?

Divorce or bankruptcy, which should come first? The problem with that question is that the best answer is “It Depends.” I know that seems like a cop-out, but for most people the answer to this questions comes on a case by case basis.

These are the questions to answer and the things to keep in mind.

Is there a lot of unsecured joint credit card debt? Will this be a contested or uncontested divorce? Does one spouse make disproportional income relative to the other? Is most of the debt in one spouse’s name? Do the spouses make good money together/individually? And are they current living together or have they already separated?

There are some generalities  when deciding whether to file divorce or bankruptcy first. And there are some things you need to know before answering the question of divorce or bankruptcy, which should come first?

1) Child and/or Spousal support is generally NOT dischargeable in a chapter 7 or chapter 13 bankruptcy

2) Property settlement agreement ordered in the divorce case are generally NOT dischargeable in a chapter 7 bankruptcy against the spouse.

2.5) Property settlement agreements ARE generally dischargeable in a chapter 13 bankruptcy

A) I generally recommend that if there is a lot of joint unsecured credit card debt, then it is best for the spouses to file a joint chapter 7 bankruptcy first (if they qualify).  The attorney fees are cheaper than filing two separate cases and there is only one filing fee. The problem is that if they still live together and have dual income, then they may not qualify for chapter 7 living together. In this case, it may be better to file the divorce first or file the bankruptcy after the couple separates and lives in two different households. A couple that is divorcing does NOT want to file a joint chapter 13 bankruptcy that will go from 3-5 years. A divorcing couple cannot survive a payment plan that long.

B) Are the spouses amicable to each other or will this a “knock down drag out” divorce? If they can agree to everything and both have a lot of debt, then it may be best to file a joint case now, ahead of the divorce. By bankruptcy first and  eliminating the debt now, it makes the settlement agreement easier when the spouses don’t have to worry about who will take the debt with them after the divorce.

C) Is all of the credit card debt only in one spouse’s name? In this case, generally once divorced, the other spouse will not be legally liable for the debt. Therefore, it is probably doesn’t matter whether the spouse with debt files bankruptcy or divorce first.

D) If there is a large amount of joint debt, the divorce court may order the spouse who makes more money to take on a greater share of the debt burden. As mentioned above, this property settlement order will NOT be dischargeable in a chapter 7 bankruptcy. So if the case is uncontested, it may better serve both spouses to eliminate the large debt so the spouse who makes more money won’t be saddled with a non-dischargeable obligation. Why would the spouse who doesn’t get saddled with the debt want to do that? Well, invariably the spouse who makes more money will be paying child support. If that spouse is struggling with paying credit card debt, you can see how that person may struggle with child support too. It helps the whole family out to file first.

E) There is the GOTCHA you have to watch for. If one spouse files bankruptcy and eliminates their liability on the joint credit card debt, it is possible when doing the divorce later, that the divorce court will take notice of this and declare since this spouse has less debt, that the spouse who filed bankruptcy should take on a greater burden of the joint debt. Why does this suck? Because that debt is  NOT dischargeable in bankruptcy as to the spouse. (The bankruptcy spouse would still not have any legal liability to pay the credit card companies, but would have to hold his former spouse harmless in case they chase after her for the joint obligations)

F) If this is going to be a messy divorce and you are worried you will get hit with a lot of debt and you won’t be able to get your spouse to agree to anything, then probably the best thing to do is finalize the divorce first and then do the bankruptcy. This way you know EXACTLY what your financial obligations will be under the divorce decree. There will be no gotcha if you don’t file bankruptcy ahead of time. So even though the credit card debt you are saddled with now is not dischargeable, remember that it IS generally dischargeable in a chapter 13 case. In that case, assuming you qualify to do so, you would pay pennies on the dollar on the obligations. When you finish the repayment plan, then whatever remains owing would be discharged.

These are generalities.  If you are facing this situation, it is highly advisable to seek experienced bankruptcy advice. The good news is that Busby & Associates offers BOTH bankruptcy and divorce services. Because of the pitfalls related to choosing whether the divorce or bankruptcy should come first, you need to discuss and consult about your case with attorneys experienced in both areas of law.  You need the assistance and advice of experienced bankruptcy and divorce counsel to walk you through the consequences of your decisions .

Please visit our website for more information about us and bankruptcy or visit our divorce blog for more information about divorces and family law related matters. You may also view our video with Bankruptcy Information.

Call us today at (713) 974-1151 to schedule a no-obligation consultation or feel free to email us at consumerlaw@busby-lee.com.

We provide bankruptcy services in the greater Houston metro area including the cities of Katy, Sugarland, Pearland, Friendswood, Clear Lake and Galveston. We also handle cases from The Woodlands, Spring and Tomball and cases in Baytown and Channelview.

We handle bankruptcy cases in all of these counties: Brazoria, Chambers, Galveston, Matagorda, Austin, Brazos, Colorado, Fayette, Fort Bend, Grimes, Harris, Madison, Montgomery, San Jacinto, Walker, Waller, Wharton

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