How to Handle Bankruptcy During Divorce

Many of my clients dealing with debt problems and bankruptcy are also dealing with a divorce. Unfortunately, it’s quite common. However, for everyone going through this, it’s a very personal and deeply troubling matter. I met the other day with a new client in Centennial to discuss their bankruptcy during divorce and Chapter 13 bankruptcy filing.

In the case of this client, their debt problems are a direct result of the couple’s separation. Instead of maintaining one home, they’ve been maintaining two. Instead of working together on debt management and household budget, they’ve been working against each other.

The divorce has dragged on almost two years while the debt has piled up and become unmanageable. He blames her for over-spending. She blames him for racking up credit card bills to make his income look lower.

As a result, the couple is at serious risk of spending money they don’t have have on divorce-related arguing. They and their kids may pay the price for this for many years to come.

Whenever possible, I like to counsel my clients in this situation to understand the Colorado bankruptcy process so they don’t do anything that could hurt their bankruptcy process or increase costs in the divorce process.

So let’s talk about the timing of bankruptcy during divorce. It’s my hope that you can avoid making some of the same mistakes my Centennial bankruptcy client has made.

The Impact a Divorce Can Have on Your Bankruptcy

It’s almost always the case that legally speaking, your bankruptcy filing will take a front seat to your divorce action. In other words, if you are currently going through a divorce and you file for bankruptcy, the bankruptcy process will be handled before your divorce can become final.

The distribution of your assets and debts will be determined during the bankruptcy proceedings. These decisions will then impact the distribution of your assets and debts after your divorce.

Additionally, the bankruptcy court will look at your income at the time of your filing to determine whether you are currently married, divorced or separated.

If you are divorced already, then the bankruptcy might have little or no impact on the separation of assets and debts determined in the divorce. However, the bankruptcy still can have an impact on the credit of both spouses if existing debts remain secured in both names.

Why it May be Better to File for Bankruptcy before Filing for Divorce

If it’s possible for you and your spouse to work together through a bankruptcy and divorce proceeding, it may be in your better interest to file for bankruptcy before filing for divorce.

In doing this, you will be able to address all debts before the divorce proceeding. This will allow you both to wipe out most of your debts before you begin the work of dividing remaining assets, time with your kids and other matters.

With a Chapter 13 bankruptcy filing, both spouses will share the repayment responsibilities. Divorce will not change these responsibilities.

Filing for bankruptcy before divorce also can be particularly helpful to couples in which one spouse makes all or nearly all of the income. In these cases, the earning spouse can have a better opportunity for filing a Chapter 7 bankruptcy to eliminate all (or nearly all) of the couple’s debts.

In both Chapter 13 and Chapter 7 bankruptcy filings, the divorce process can continue after the court completes the bankruptcy process.

When Filing for Divorce before Bankruptcy Makes Sense

For couples with a high income, a Chapter 7 bankruptcy filing might be impossible. This is because a Chapter 7 bankruptcy filing requires very low income.

If one spouse makes very little, especially compared to the other spouse, it might make better sense to postpone bankruptcy action until after the divorce. The lower-earning spouse could eliminate most or all of the debts they are left with after the divorce.

In cases in which one or both of the spouses has suffered a job loss, then both may be able to proceed with a Chapter 7 bankruptcy filing after a divorce. The state of Colorado conducts what is called a “means test” to determine income eligibility for bankruptcy.

In some cases, both spouses may qualify for Chapter 7 bankruptcy individually after a divorce even if they could not do it jointly.

In certain cases, it’s also possible to protect post-divorce assets. Let’s say one spouse gets the family home in the divorce and is able to re-title the home to their name only. The other spouse could file for bankruptcy after the divorce, allowing the other spouse to keep the home.

If one spouse will be responsible for alimony or child support, then filing for bankruptcy after the divorce could help the paying spouse to seek relief from the court in the amount they must pay toward that support.

If you are the spouse who will receive the support and you believe your spouse might be thinking of filing for bankruptcy after your divorce, you want to talk with your lawyer immediately to discuss the impact on your finances if this happens and whether you should file bankruptcy during divorce.

Contact me, Barry Arrington to Discuss Your Bankruptcy Questions

If you are considering divorce and bankruptcy, it’s important that you get qualified legal advice before you take further steps. The impact on you both financially and legally can be significant.

You can read some more frequently asked questions about bankruptcy in the Denver metro area here. Or simply contact me online to schedule a free consultation. The sooner we get to work on your case, the more control you can have over your financial outcome.

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