Divorce And Bankruptcy: Which One First?

Couple signing documents for divorce or bankruptcy in judge’s office next to desk figurine of blindfolded Justice holding scales

 Divorce And Bankruptcy: Which One First?

Money problems and disagreements regarding money are widely known reasons for divorce. Therefore, it should come as no surprise that divorce and bankruptcy sometimes go together. However, if you are contemplating both, you might be confused about which process you should take on first. Arizona spouses in this situation may wish to consider contacting a knowledgeable Arizona family law attorney at Sullivan Law Office by calling (480) 719-2558 and requesting a confidential consultation. 

Is It Better To File Bankruptcy Before or After a Divorce? 

Whether you should file for bankruptcy before or after your divorce is a personal decision. A number of important factors can influence this decision and what is best in a particular situation. Some of the questions a spouse may need to answer before deciding which path to take include:

  • How much debt do you have? 
  • Is the debt marital or separate?
  • How will bankruptcy affect your property?
  • Does your spouse want to file bankruptcy?
  • Will you have debt associated with your marital settlement agreement? 
  • Which type of bankruptcy do you qualify for? 

An experienced family law attorney at Sullivan Law Office may be able to review your situation and give you customized advice tailored to your particular circumstances. 

Benefits of Filing for Bankruptcy First

There can be some advantages to filing for bankruptcy before getting a divorce. Some of these include:

  • You can file a joint petition – Bankruptcy begins when an individual, married couple, or business files a petition in bankruptcy court. Married couples can (but are not required to) file a joint petition. If they do this, they will be treated as one unit. Both spouses receive bankruptcy protection when they file a joint petition.
  • Fees are lower in the aggregate – If both spouses file together, the filing fees are the same as they would be for one individual. These fees would be doubled if the spouses wait until they are divorced and both file bankruptcy separately. The spouses could also use the same bankruptcy lawyer, saving on legal fees.
  • You can simplify the property division process – By filing bankruptcy before divorce, spouses may be able to simplify the property division process during divorce. There will be less property and debt to fight about, or for the court to make decisions about. At the same time, each spouse may be able to protect more of their property in bankruptcy because married couples may be eligible for more exemptions than individuals.
  • You can work together – If spouses file bankruptcy together, they can begin a collaborative process that may benefit them as they get divorced. Bankruptcy filings require a lot of paperwork and financial disclosures, many of which are repeated in the divorce process. 
  • Starting with bankruptcy may be faster – If you file for divorce and then later file for bankruptcy, the automatic stay triggered by the bankruptcy will halt divorce proceedings until the bankruptcy case is resolved. Although the United States Bankruptcy Court for the District of Arizona explains that bankruptcy petitioners may file for relief from the automatic stay, there are fees associated with filing the motion for relief. Filing for bankruptcy first, followed by divorce, avoids this difficulty.

Benefits of Filing for Divorce First

Every situation is different. Therefore, there may be benefits to filing for divorce first, followed by initiating the bankruptcy case. Filing for divorce first might make sense if any of the following apply:

  • The petitioner does not qualify for their preferred type of bankruptcy protection as married, but would qualify if filing as an individual.
  • One spouse does not want to file for bankruptcy.
  • Including debt brought on by the divorce is important to the bankruptcy case.
  • The petitioner qualifies for more property exemptions under an individual bankruptcy filing than they would if filing for bankruptcy with their spouse. 

Divorce and bankruptcy are two legal processes that can each have a dramatic impact on an individual’s life and property. Understanding the legal effects of each is critical in making a wise determination regarding which case to file first.

Legal Effect of Divorce on Creditors 

When a couple divorces, the divorce court will divide marital property and marital debts, meaning that the court may assign responsibility for the discharge of specific debt to either spouse. However, if the terms of any agreement, such as a loan agreement, under which the debt was incurred included both spouses as responsible parties, a divorce does not change either spouse’s personal liability for that debt. 

The divorce court does not have jurisdiction over the creditors and cannot invalidate the original agreement between the debtor(s) and creditors. The creditor can still pursue collection from the other spouse.If a spouse is ordered to pay certain debts and does not, the other spouse’s remedy is to return to court through a contempt action and ask the court to order the spouse to fulfill the obligations described in the divorce decree. 

Legal Effect of Bankruptcy

When someone files bankruptcy, they ask the court for relief from their debts. After filing a bankruptcy petition, an automatic stay is applied. According to the American Bar Association, this automatic stay prevents further collections and litigation activity, such as garnishments, repossessions, or foreclosures. At the conclusion of the bankruptcy case, some or all of the debt is discharged, meaning that the debtor no longer has the legal obligation to pay it. 

Types of Bankruptcy 

Most consumer bankruptcies for individuals and married couples fall under Chapter 7 or Chapter 13 of the Bankruptcy Code. These types of bankruptcy have somewhat different processes and aims, so understanding which type of bankruptcy is most appropriate for your situation is essential to making an informed decision.

Chapter 7 Bankruptcy 

Chapter 7 bankruptcy is the type of bankruptcy that most consumers prefer to have, but not everyone qualifies. The reason for both the broad consumer preference and the restrictions on qualification is that Chapter 7 bankruptcy discharges a lot of debt, which can allow the debtor to rebuild their life faster without having to be tied up in court proceedings for years. 

According to the United States Courts, individuals filing for Chapter 7 bankruptcy must meet income guidelines based on household size to qualify for Chapter 7 bankruptcy. Chapter 7 bankruptcy liquidates the petitioner’s assets and uses the proceeds to pay down some of their accumulated debt. However, there are exemptions that may allow individuals filing for Chapter 7 bankruptcy to protect some of their property. At the end of the bankruptcy case, many unsecured debts can be discharged within a few months. 

Chapter 13 Bankruptcy

According to the United States Courts, Chapter 13 bankruptcy gives debtors a chance to develop a plan to repay their debts. They make installment payments to the bankruptcy trustee for three to five years, and then their remaining debt is discharged. 

Contact an Arizona Family Law Attorney for a Confidential Consultation 

Divorce and bankruptcy are complex legal processes. Consider contacting a knowledgeable lawyer at Sullivan Law Office for help. You can reach our office by calling (480) 719-2558.