If a divorcing couple decides that they need to file for bankruptcy, they have two more decisions to make:
(1) Should they file before or after they divorce?
(2) Should they file jointly?
If the couple is filing for Chapter 7 bankruptcy and their debts are joint debts, it usually makes sense from a financial and emotional perspective to file jointly before they divorce.
Why does it make sense from a financial perspective?
Attorney Fees. The couple can hire one attorney to represent them in their joint bankruptcy case. Typically, bankruptcy attorneys charge less for a joint Chapter 7 bankruptcy case than they charge for two separate individual Chapter 7 cases.
Filing Fee. Currently, the Chapter 7 bankruptcy filing fee is $299. A married couple filing a joint Chapter 7 bankruptcy petition will only have to pay for one filing fee. If the two parties filed for Chapter 7 bankruptcy separately, they would each have to pay the $299 filing fee.
Divorce legal fees. If the parties have filed for Chapter 7 bankruptcy jointly before beginning to work with their divorce attorneys, the parties will have less to decide (and argue about) during the divorce process. If the parties have accumulated a large amount of debt together, then that debt will have to be dealt with during the divorce process. This generally results in higher legal fees.
Means Test. In order to file for Chapter 7 bankruptcy, the party or parties must satisfy the means test. The means test is based on the party’s income. In order to pass the means test, the debtor’s income must be below the median income for the debtor’s household in the debtor’s state.
If the parties file a joint petition before they divorce, it may be easier for them to satisfy the means test and be able to file for Chapter 7 bankruptcy, even though one of the parties may not have been able to satisfy the means test on their own.
Property Exemptions. The parties will be able to exempt more property if they file jointly than if they file separately.
Eliminating the problem of collection and contempt actions. Bankruptcy law does not allow a divorcee to discharge debts ordered in the divorce, but one problem that commonly comes up is a party’s failure to follow the divorce decree.
For example, if the couple’s debts are marital debts, but they are only in one spouse’s name, the couple’s divorce decree will order the parties regarding the division of this debt. It is important to remember that this decree is valid and enforceable between the spouses and the divorce court. However, the divorce decree will not alter the parties’ contract with the creditor.
Thus, if the debts are in the husband’s name, but the wife is ordered to pay part of these debts in the divorce decree, and the wife doesn’t pay her share, the husband is still “on the hook” with the creditor for those debts. The husband will be able to bring a contempt action against his ex-wife for her failure to comply with the divorce decree, but that will cost him money and take time. Also, if the ex-wife does not have the money to pay what she owes the creditor at that time, the husband’s credit will still be damaged and the creditor may take collection actions against him.
Why does it make sense from an emotional perspective?
Moving on with your life. Both divorce and bankruptcy are major life-altering events. If you are divorcing your spouse, and getting a “fresh start”, it might also be nice to have your debts discharged (if filing for bankruptcy makes sense in your situation).
What are some of the downsides of filing Chapter 7 bankruptcy jointly before the divorce?
The blame game. If issues arise during the bankruptcy process that may affect the outcome of the case (possible fraud, for example), the parties will likely play the “blame game” with each other.
Individual needs. It may make sense for one spouse to use the state exemptions and the other spouse to use the federal exemptions. This cannot be done if the parties are filing a joint Chapter 7 bankruptcy.
Cooperation and communication. People who are getting divorced are often doing so because the parties struggle with communication and are not able to cooperate. Filing a joint Chapter 7 bankruptcy requires the parties to cooperate with one another and to have good communication skills. Before a divorcing couple decides to file a joint Chapter 7 bankruptcy, they should evaluate their ability to act civilly towards one another.
What about Chapter 13 bankruptcy?
Generally, it is better for a divorcing couple to wait until after they divorce to file for Chapter 13 bankruptcy, and to file separately. Chapter 13 cases last a lot longer than Chapter 7 cases – they can last up to five (5) years. If the couple files jointly, then they will have to cooperate during that entire Chapter 13 case AND make joint payments.