Divorce & Bankruptcy: A Double-edged Sword

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Divorce & Bankruptcy: A Double-edged Sword

27
Jan,2021

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Fun Fact: Divorce is among the leading causes for going bankrupt today. Believe it or not, many rich and famous people have had to give up a luxurious lifestyle after being involved in a messy divorce. Couples who opt for a prenuptial agreement usually find themselves in a better place if their marriage fails.

Divorce and bankruptcy are two separate legal matters, which have a strong impact on one’s finances. When you put these two together, the burden of obligations and the resulting stress can become unbearable. Bankruptcy and divorce should never be filed together because they will clash and add to your problems. Tackle one battle at a time, and you may survive. 

Divorce & Bankruptcy

Divorce & Bankruptcy

What Comes First?

Now that you have understood that bankruptcy and divorce cannot be conducted in the chorus, you must be wondering what to deal with first? There is no precise answer to that query as the most suitable line of action depends upon the relationship status with your spouse, the state of your financial affairs, and the laws of your state.

As every individual’s marriage and money problems are not the same, it is best to consult an Alabama bankruptcy attorney before finalizing your decision. There are several different types of bankruptcies, thus the type of bankruptcy you and your spouse prefer may also affect the order of filings. Most couples go for Chapter 7 Bankruptcy and apply for it before initiating the divorce process. 

Why Chapter 7 Bankruptcy?

The reason behind the popularity of Chapter 7 is the opportunity to get all unsecured debt discharged and the short timeline of the process. Unsecured debt primarily includes unpaid medical, credit card, and utility bills. Filers still have to make up for secured debts like student loans, mortgages, and government taxes; nonetheless, it still provides major financial relief.

Chapter 7 bankruptcy can be closed within 3 to 6 months, whereas other types of bankruptcies like Chapter 13 and Chapter 11 implicate a payment plan that extends over 3 to 5 years. Irrespective of how appealing Chapter 7 sounds, there’s a chance that you and your spouse may not qualify for it. 

Filing Bankruptcy before Divorce

Filing for bankruptcy before divorce only works if you and your spouse are on amicable terms. Joint bankruptcy with your spouse has its advantages, especially if your incomes combined do not exceed the threshold for Chapter 7.

Marital assets and debts can be better managed in bankruptcy, and couples are eligible for greater exemptions. Together you get to secure a greater amount of assets and thereby avoid foreclosure or liquidation.

On the contrary, if you and your spouse have to go through Chapter 13 bankruptcy, this means you will have to put up with each other for years. 

Filing Divorce First 

If the sum of your own and your spouse’s income surpasses the limit of Chapter 7, it is preferable to file for divorce first. You two may individually qualify for Chapter 7 after the divorce. If Chapter 13 is inevitable, but you and your spouse cannot collaborate or maintain a civil relationship, ending the marriage shall naturally become a priority.

If you file the two motions together, your marital assets are going to be blocked by bankruptcy anyway; hence, the divorce proceedings will linger on. 

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