Filing Bankruptcy During Or After Divorce

Money issues and financial stress are often at the heart of the disputes that bring a couple to divorce. So it’s no surprise that a couple could find themselves facing both divorce and bankruptcy. Even if you aren’t dealing with these legal situations at exactly the same time, if you are anticipating post-divorce financial hardships for either yourself or your soon-to-be-ex, now is the time to consider your bankruptcy options and to understand how they will impact your divorce proceedings.

At Hausen Law, our team of Ohio bankruptcy lawyers understands bankruptcy inside and out, including how it intersects with divorce concerns. We’re here to share our experience-based thoughts on the various considerations to keep in mind if you are facing this situation. As always, feel free to reach out and contact us with questions.

The Intersection Of Divorce And Bankruptcy

When a household splits, unless both former spouses are equal earners and have enough capital to carry on living as they were prior to the divorce, then it’s highly likely that the increase in expenses and reduction of household income could bring significant financial stress. One party may now be paying alimony and child support, while the other struggles to find suitable employment that also allows time for childcare and family obligations. If they are able to find work, then the increasing childcare and living costs combined with residual legal expenses may seem too much to bear. Either one or both individuals may find themselves financially taxed to a point that is unsustainable.

Can a couple in the middle of a divorce proceeding who anticipates this problem file for bankruptcy now? If they are already divorced, what impact will it have if they decide to file? Let’s get into some answers from an experienced Ohio bankruptcy lawyer.

Filing for Bankruptcy Before Your Divorce

While you are still married, even if you are currently involved in divorce proceedings, you can file jointly for bankruptcy. This can be beneficial because there will be only one set of legal fees to handle. Filing for bankruptcy before your divorce is finalized can also help to simplify the division of assets and also the debts that you hold–once the bankruptcy is discharged or a repayment plan is established, the debts are no longer part of your divorce case.

However, there are some complications that can arise if you decide to file for bankruptcy prior to divorcing. For one thing, you may not pass the means test to qualify for chapter 7 and so have to opt for chapter 13 bankruptcy. This means that your debts will not be wiped clean right away, but that you will have to enter into a 3 to 5 year repayment plan. 

Filing jointly for chapter 13 bankruptcy does not prevent you from getting divorced, but it does complicate matters. This is because both you and your ex will be associated with the repayment plan and the debt obligations–the bankruptcy case doesn’t automatically split. Divorce may also significantly alter your household income, expenses and living situation, which may make it necessary to update or modify the repayment plan which requires court approval. And, if in the end, one of you does not uphold your end of the repayment, creditors have the right to go after the other party to the bankruptcy to recover the debt owed them.

On the other hand, if you as a couple do pass the means test and so can file chapter 7, filing during divorce will remove shared and personal debt thereby simplifying your divorce process and preventing creditors from coming after either of you in the future. All of that said, regardless of which chapter you file, the automatic stay that goes into effect after filing with bankruptcy court will halt the division of assets in your divorce proceedings. It does not generally impact child custody, visitation, child support, spousal support (alimony), or domestic violence proceedings, but it can prolong and complicate the overall process. If you are able to delay the divorce a few months until your bankruptcy case is resolved, it will typically be in your best financial interest. Consult with your trusted Ohio bankruptcy lawyer to discuss the particulars of your case. 

Filing for Bankruptcy After Your Divorce

If you cannot delay your divorce, or you have already divorced and now find yourself in unexpected financial distress, here’s what to know about filing for bankruptcy after divorce. 

It is important to remember that your or your ex’s creditors were not party to your divorce and so are not bound by the divorce decree. Sometimes a court may decide that only one party is required to repay a certain unsecured debt, such as a credit card balance. However, if both names remain associated with the debt, and the responsible party cannot keep up with payments and so files for bankruptcy after the divorce, creditors can still come after their former spouse for repayment. 

The prevention of creditors attempting to reclaim the money owed them is one big reason to opt for filing for bankruptcy prior to finalizing a divorce decree. Ideally, the best time to file for bankruptcy would be before filing for divorce at all. That said, it simply isn’t always possible to know or predict that you may need to file for bankruptcy in the future. Either way, and whatever your circumstance, it’s good to be somewhat aware of the situation you will be facing. 

Another important consideration when it comes to timing is the relationship that you have with your soon-to-be-ex. If you cannot get along and have a very contentious relationship, then it may be easier and less stressful to simply wait until after your divorce is finalized before filing for bankruptcy, if need be. And since your available income may take a hit following divorce, you may also be able to qualify for chapter 7 bankruptcy. This would allow you to completely discharge eligible debts without worrying about whether or not your spouse will work with you. Of course if your relationship is particularly hostile or you are threatened in any way, then get out of that negative situation as soon as possible and worry about filing for bankruptcy later–safety and wellbeing take precedence. 

Bankruptcy and Divorce: How To Protect Yourself

You may not think that you or your ex-spouse will end up filing for bankruptcy following divorce, but life changes fast and one of you may find yourself in this situation. How can you both protect yourselves from creditors potentially seeking repayment for the other’s debts?

The number one, most important thing to do is to eliminate joint debt wherever possible. This can include taking steps like:

• Refinancing property so that it is only in the person’s name who will be awarded the property by the court
• Application for an assumption of a mortgage by the party who will have ownership and residence
• Sell jointly held property and divide the proceeds
• Pay off joint credit card accounts and obtain separate credit accounts

Without joint debt in the picture, you can rest assured that neither of you will be held responsible for each other’s debts.

Get Your Bankruptcy Questions Answered By Our Ohio Bankruptcy Lawyers

Whether you are seeking divorce and considering bankruptcy, or you’ve already divorced and are finding yourself in hard financial times, you aren’t alone–the experienced chapter 7 bankruptcy lawyers at Hausen Law are here to help. 

When bankruptcy and divorce law intersect, sound, trusted legal guidance is essential. Mistakes can have long-term consequences, whereas when you work with a knowledgeable bankruptcy attorney you can expect expert advice on timing, how to protect your assets, and how to reduce financial exposure. An experienced Ohio bankruptcy lawyer can work with you to evaluate your situation and protect your financial future. There’s no one-size-fits-all answer when it comes to dealing with both divorce and bankruptcy, but strategic planning can certainly make things less stressful. 

For help with all things bankruptcy in Ohio, contact our Northeast Ohio Bankruptcy Attorneys–we’re here to help. Hausen Law is happy to serve all of Northeast Ohio, including the Akron, Canton, Cleveland, Wooster, Dover/New Philadelphia, and Youngstown communities. Contact us today to set up a free consultation or to inquire about our credit counseling and credit repair programs.