Bankruptcy can be overwhelming. Combine it with a divorce and it can be downright daunting. No matter how stressful these situations seem, know that there will be a light at the end of the tunnel.
Which one should you file first—bankruptcy or divorce? And should you file bankruptcy with your spouse? The answer to these questions will depend on where you live, what debts you have, how much property you own and what type of bankruptcy you wish to file.
If you file bankruptcy and divorce at the same time, they won’t be dealt with simultaneously. One will take priority depending on your circumstances. Filing both at the same time often puts the bankruptcy case on hold until the divorce is complete.
Should I File for Bankruptcy First?
While there’s no “right” time to file for bankruptcy, there are instances where filing for bankruptcy first may be beneficial.
Debts are divided during divorce proceedings. One advantage of filing for bankruptcy before filing for divorce is that you can cancel out joint debts and use more exemptions. You’ll reduce your financial burden and streamlines the divorce process later. With less property, assets and debts to divide, your divorce proceedings may be shorter and less expensive.
If you already qualify for Chapter 7 bankruptcy as a couple, you may want to proceed with bankruptcy before filing your divorce. Chapter 7 can wipe away unsecured debts like medical bills and credit card debt. Filing for Chapter 7 is a relatively quick process that takes about three to four months.
Should I File for Divorce First?
Obtaining a divorce before filing bankruptcy can ensure that both parties qualify for Chapter 7.
Under Chapter 7, your income must fall at or below a requirement set by the state. Your joint income may exceed this requirement and disqualify you if you file as a couple. After a divorce, your income will be less. Using your individual income—not the combined income of you and your ex-spouse—may qualify you for Chapter 7.
If you’re planning to file Chapter 13 bankruptcy, you’re looking at a timeline of three to five years. For couples who want to legally separate, this is likely too long to wait before getting a divorce, so filing for divorce first may be the only option. After the divorce, you can file bankruptcy individually.
Joint v. Individual Petitions
Bankruptcy filing fees are the same for individuals and couples. Filing jointly can cost less than filing as two individuals.
More exemptions are also available for those who file joint petitions. In states like Missouri, you can double up on exemptions for certain types of property. Both you and your spouse can use the state set exemption amounts to protect more of your assets, giving you a reason to file bankruptcy together before getting a divorce.
Joint filings discharge qualifying debt for both spouses and can reduce issues when dividing assets later. However, filing together means you must be able to work together. You should consider filing individually if you and your spouse cannot cooperate.
For people who need debt relief immediately, filing bankruptcy as an individual may make more sense—especially if your spouse doesn’t wish to file.
Need to navigate bankruptcy and divorce?
Contact Reynolds & Gold. We’ll help determine the best course of action and support you through the bankruptcy process.