Divorce and Bankruptcy:
Financial stress and marital difficulties very often tend to be related. Divorce can be financially devastating and ultimately can lead to the need to file for bankruptcy. Bankruptcy can also be one of the causes of a divorce. Regardless of which option comes first, it is important for individuals to be aware of the different options when it comes to filing for both divorce and bankruptcy, and to understand the implications of the order in which the matters are handled.
Divorce and bankruptcy both concern the distribution of property. Both divorce and bankruptcy also attempt to define the parties’ respective liability for certain obligations. This intrinsic overlap can lead to potentially complex problems based on fundamental differences and tensions between the two bodies of law. Where matrimonial law often has the primary focus on providing a former spouse with economic stability, as compared to a debtor seeking relief from their obligations by filing for bankruptcy, it is not uncommon to encounter problems as a result of these competing interests.
Parties who choose to handle bankruptcy first will find a number of benefits. As long as the parties are still married, they can file a joint bankruptcy petition, even if they are physically separated. Joint filing will save on filing fees and attorney fees as the couple will be treated as one economic unit; they will pay only one filing fee and one attorney’s fee. If spouses file separately then each of them will have to pay a separate filing fee and a separate attorney fee. Parties filing for bankruptcy together first nevertheless need to be able and willing to work past their differences and have the ability to clearly and effectively communicate with each other, which may not always be possible.
The bankruptcy court classifies debt much differently than supreme court does in handling a divorce matter. Accordingly, there can be very different results depending on which matter is handled first. A quick example of the two views is illustrated in the chart below.
|Court||Bankruptcy Court||Matrimonial Court|
|View of Debt
|Debt is owed only by the individual whose name it is in.||Debt incurred during the marriage as “marital debt” regardless of whose name it is in.
Husband has $30,000 in credit card debt in his name alone, which he incurred during the course of the marriage.
|Debt in Husband’s name alone is owed only by Husband.||Debt incurred during the marriage is deemed an obligation of both spouses.|
|Result||Likely to discharge all $30,000 leaving $0.00 for the matrimonial court to divide.||Likely to even out the debt between parties, each party liable for 50% or $15,000.|
Furthermore, the Bankruptcy Code allows each filing spouse to claim his or her own exemptions. This means married couples filing jointly have double the bankruptcy exemptions that may impact what property and possessions they are permitted to keep safe from creditors – specifically, for the purposes of divorce, the marital residence. Historically known as “doubling,” spouses in New York that file together can each claim the full amount of the exemption, as long as each spouse has an ownership interest in the property.
If both spouses file bankruptcy and all matrimonial debt is discharged, it no longer needs to be handled for the divorce proceedings. A simpler divorce can often be less costly, which might put the parties in a better financial position to begin a new chapter of their individual lives.
However, there can also be instances where it makes more sense to handle the divorce matter prior to filing for bankruptcy. If you can anticipate the division of property being a difficult issue to resolve, it may make sense to handle the property division first in a divorce, and then file for bankruptcy once the divorce matter is resolved. Debts owed to a spouse pursuant to a divorce
It is important to understand there are options when contemplating divorce and bankruptcy simultaneously, and that a number of factors should be considered when determining the best plan to start a new chapter in your life.
Individuals seeking help in reducing or managing their debt will file under either Chapter 7 or Chapter 13.
Chapter 7 is called a liquidation bankruptcy. You can obtain a discharge of most of your unsecured debts (credit cards, medical bills, car loan deficiencies, and unsecured personal loans), but may have to turn over non-exempt property in return. The Bankruptcy Code offers exemptions for many of assets that most people have, including retirement accounts and home equity, so in reality, many people can obtain a discharge in Chapter 7 without losing any assets. Chapter 7 typically only takes between three (3) to five (5) months to fully discharge an individual’s debt, compared to Chapter 13 that takes between three (3) to five (5) years.
To qualify for Chapter 7, an individual must not be over the median income for their family size in New York. Chapter 13 may also be the only bankruptcy option for someone who is over the median income, however, Sometimes a couple that would be over the income limits for Chapter 7 while still living together may individually quality for a Chapter 7 once they have physically separated and divided their assets or made payments to their now ex-spouse pursuant to their divorce.
Chapter 13 Bankruptcy involves repayment of debt over a 3-to-5-year period. Someone may opt for Chapter 13 when they have debt, they want to repay but need extra time to do so, such as mortgage arrears or certain tax debts. Under Chapter 13, a person’s spending and purchasing will be heavily monitored, and if any of the payments due to the trustee are missed, the individual will not receive a discharge of their debt and all advantages of the bankruptcy will be lost.
Bankruptcy is designed to give you a fresh start, free of wage garnishments, bank restraints, collections calls, and many debt payments. It is important to speak to an attorney knowledgeable in the interplay between divorce and bankruptcy before deciding on the best course of action for you. Call us today to discuss the possible solutions and courses of actions available to you.
Consider the types of bankruptcy that may be available to you.
|Chapter 7||Chapter 13|
|Type of Bankruptcy||Liquidation||Reorganization|
|Who Can File||Individuals and business||Individuals and sole proprietors|
|How long to receive discharge||3-5 months||3-5 years, but typically 5|
|Eligibility restrictions||(1)Household income must be below median for state in order to pass the means test||Have regular income and not more than $419,275 in unsecured debt nor $1,257,850 in secured debt|
|What happens to property||Sell non-exempt assets to pay creditors||Keep all property but must pay unsecured creditors amount equal to value of non-exempt assets.|
|Can creditors contact||No||No|
|Length on credit report||10 years||7 years|
|Advantages||Takes less time and requires no payments to creditors||Keep non-exempt assets, might look better on credit report
|Disadvantages||Sell assets to pay off creditors.||May not be able to keep non-exempt assets if cost too much and must pay monthly installments for 5 years|