Divorce and Bankruptcy: How It Works

Bankruptcy and divorce: two areas of law most people hope to avoid in their lifetime

As a lawyer who has practiced in both areas of law, I want to unpack the stigma and help people who find themselves in the situation of dealing with bankruptcy and divorce at the same time.

Divorce and bankruptcy can come up at the same time for many reasons. Financial hardship is one of the leading contributors to divorce. Conversely, many times a divorce can lead someone to file bankruptcy.

How Do Bankruptcy and Divorce Intersect? 

To fully understand how bankruptcy and divorce intersect, you must first understand both.  Most people understand the concept of divorce. When a couple wants to end their marriage, they seek a divorce.

Financial Issues and Divorce

But many financial issues come up when a couple ends a marriage. Not only are there spousal maintenance and child support issues, but a couple must also deal with property division dividing up marital assets and debts. Larger items, such as real estate, can be difficult to divide. If neither party can afford to buy the other out, then the couple may be forced to sell the home, sometimes quickly.

Aside from losing half your partner’s income and half of your assets, you are also paying court fees and attorneys, mediators and sometimes appraisers, or experts to finalize your divorce. If you are already in financial trouble, going through divorce may push you over the edge.

Bankruptcy for Individuals

While most people are familiar with divorce and the issues involved, most people are not familiar with bankruptcy and even are scared to discuss it. There are many different types of bankruptcy; however, most individuals file either a Chapter 7  bankruptcy or a Chapter 13 bankruptcy .

• A Chapter 7 bankruptcy is a “liquidation” where a federal court grants relief from paying unsecured debts alike credit card debts, medical bills, and personal loans. Secured debt and obligations like student loans, taxes, child support and spousal maintenance are not eligible for discharge in this type of bankruptcy.  There is no limit on the debt a filer may have and there is no repayment plan.
• A Chapter 13 is a “reorganization” of an individual’s debts and financial obligations with repayment of the debts over a 3 to 5 year period. There are debt limitation requirements in a Chapter 13 and repayment of debts are made to creditors under a repayment plan approved by a federal court.

The type of bankruptcy filed will be determined by the amount of debts, assets, and income of the individual. The purpose of any bankruptcy is to provide the debtor a fresh start and relief from

Dealing with the Hardship of Bankruptcy and Divorce

Bankruptcy and divorce can intersect in several ways. Two common scenarios are:

1. You and/or your spouse filed a bankruptcy and have already received a discharge prior to filing for divorce.
2. You and/or your spouse filed a bankruptcy and are still in the bankruptcy when you want to file for divorce.

The first scenario is the easiest to deal with. When a bankruptcy has just been completed, and then you file for a divorce, you and your spouse have already discharged your debts and are not likely to have many assets to divide in the divorce.

Divorce When Your Spouse is in Bankruptcy

The second scenario is more difficult. Starting with the question of “can you file a divorce while your spouse is in bankruptcy?” If your spouse is going through the bankruptcy process it may be worth it to wait until the bankruptcy is finalized before you file a divorce. This is because the bankruptcy takes precedence over the divorce. When a bankruptcy is filed, an “automatic stay” is entered meaning that no lower court proceedings can continue until the bankruptcy is finished or they get relief from the bankruptcy court. This is especially true if the divorce will include the division of marital assets.  It is likely that you would not be able to obtain a divorce judgment until the bankruptcy is over.

So, what if you are in need of both a bankruptcy and a divorce, what should you do first:

• If many of the debts are joint, then you may want to file a joint bankruptcy with your spouse prior to filing for divorce. Discharging your debts and getting your finances in order prior to filing for divorce will make the process run a lot smoother.
• If the debts are mainly the property of one spouse, you want to discuss whether it would be more beneficial to you to wait until your spouse’s bankruptcy is complete or go ahead and file for divorce now. If you are a spouse with a lot of debt, it makes sense to discharge the debt sooner rather than wait until the divorce is over.

So, when does it benefit you to file for a divorce first? Well, one scenario is if you and your spouse’s income is too high you and your spouse have an income too high to qualify for a Chapter 7.  To get the best advice on how to move forward, consult with a divorce attorney in Chicago. For a confidential consultation with Anderson Boback & Marshall, contact us today.

Experienced Divorce Attorneys That Know Bankruptcy Make all the Difference 

If you should find yourself in this situation, you should consult an attorney who is knowledgeable in both of these areas. Each case is different and there are many personal factors to consider. Divorce and bankruptcy are two of the most stressful things a person can go through; however, having a knowledgeable and experienced attorney can make all the difference.

We invite you to contact Anderson Boback & Marshall to schedule a consultation to discuss your family law or divorce matter including any questions you may have about dealing with divorce and bankruptcy at the same time.