Going Through a Divorce and Bankruptcy?

Why do the Bankruptcy First

Sadly, the agony of divorce, especially ones caused by financial distress, can be compounded by the necessity of bankruptcy. Debts that were difficult to manage under one household will be even more so when the same income must support two. If it appears that a bankruptcy will accompany a divorce, the question arises - what should come first?

For a variety of reasons, it usually makes sense to pursue the bankruptcy first.

Division of Debt in Divorce

First, this makes the allocation of debt and the steep legal fees associated with negotiating them moot. They simply will go away. To understand the importance of this advantage you must understand the difference between property settlements (i.e. allocation of debt) and maintenance. Allocation or assignment of debt pursuant to a divorce is dischargeable in bankruptcy but maintenance is not.

That is why family attorneys will fight hard and (thus expensively) to have debt characterized as maintenance. If successful, it cannot be discharged and the spouse is stuck with it. And if there is any doubt about the issue which there often is, you can find yourself back in court fighting over the issue paying more legal fees.

Avoid a Monthly Payment Plan

Also, although allocation of debt is dischargeable it usually requires a Chapter 13... even if the person would have qualified for a Chapter 7. This means making monthly payments that never would have been paid had the bankruptcy proceeded first.

So, the risks of filing the bankruptcy after the divorce are: Higher family attorney fees, having the debt become non-dischargeable and facing an otherwise preventable chapter 13 and the ensuing monthly payments. Lastly, if the spouses are in agreement they might be able to file jointly - thus, preventing the need for them to file bankruptcy separately which would require two separate fees. In short, pursuing the BK first is usually cheaper and simpler.