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Timing Matters: Bankruptcy Or Divorce First?

8 February 2016 by Jo Rodriquez

If you know that both bankruptcy and divorce are certain events in your future, you should carefully consider the order that these two major legal issues will proceed. To help you make a good decision, read below to ensure that you avoid more complications by filing in the correct order for your particular situation.

Type of Bankruptcy: Chapter 7 or Chapter 13

Since chapter 13 involves a reorganization of your debts that can take two to five years, you may want to go ahead and get your divorce out of the way and file on your own if using this form of bankruptcy. Not only is time a factor here, but the division of assets and debts will likely be very different after your divorce. By comparison, a chapter 7 bankruptcy can usually be completed in a few months. These two types of bankruptcy are the most common, each with their points.

Filing Chapter 7 Before Divorce

1. Some of the most contentious issues when divorcing are the division of debts and assets. Filing a chapter 7 bankruptcy before you head to divorce court could lesson the acrimony that surround these issues, thus potentially saving both parties both time and money spent haggling in court. It should be noted that chapter 7 will wipe out nearly all debt, with the exceptions of taxes and student loans.

2. Chapter 7 bankruptcy allows couples in some states to double their exemptions, which is a dollar amount applied and deducted from assets like real estate, personal property and vehicles. You must surrender assets valued at over a certain dollar amount to the bankruptcy court in an attempt to pay at least some of your creditors. Since having a bigger exemption means possibly getting to keep more property, you can preserve more of the marital estate for your subsequent divorce.

Wait to File Chapter 7 After Divorce

The bankruptcy statutes have adopted a "means" test that seeks to disqualify some high-earning filers from eligibility for chapter 7. In short, if you make more money than your state's median income, you may not be able to file. Filing jointly to gain more exemptions can also potentially double your income, which could put you over the limit for your state. There are more variables to consider, such as what counts as income and household size, for this calculation to be totally accurate, so be sure to discuss this issue with a bankruptcy attorney, like Thomas A Blake, for more precise information.

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