It is well known that the leading cause of divorce is money....or rather the lack of money. What I have come to learn after meeting with many divorced debtors in my bankruptcy practice, is that the opposite is true as well: Divorce is often one of the leading causes of a person needing to file for bankruptcy protection. Almost every recently divorced debtor that I have met with have said that their finances are a mess due to the divorce. The same debts which may have propagated the filing for divorce are now doubly troublesome: Generally post-divorce only one spouse is making payments on the debt, there is only one source of income, and to top it off, there are those lawyer fees incurred during the marital action.
Advantages to Filing Bankruptcy Before Divorce
Often, I am asked by family lawyers if their client should file bankruptcy before the marital action or after the parties have divorced. There are advantages to filing now rather than later. Firstly, the debts the client is seeking to "discharge" (wiped out) in the bankruptcy are commonly joint debts: that is, debts for which both the husband and wife are both responsible for. If the only one spouse files for bankruptcy protection, the other spouse would remain liable for the debt. Thus, I recommend that all obligors on joint debt file for bankruptcy. Whereas, only a husband and wife (and in some circumstances a domestic partnership) can file a joint petition, it is less expensive and easier to file as husband and wife.
Joint Debts in Bankruptcy
Secondly, filing for joint bankruptcy will exclude a common issue raised in a martial action: the responsibility for joint debts. Typically a separation agreement or property settlement agreement will specify which party will be responsible for marital debt. This issue tends to be highly controversial and resolving the issue may cause unneeded expense in the marital action and delay the entry of the Judgment of Divorce. Moreover, simply because one spouse agreed to be responsible for the joint debts as part of the divorce, does not mean that the creditor will not seek to be paid by the other spouse if the debt is not paid. The creditor will indeed attempt to collect from all obligors and report the payment history delinquent. The creditor is not bound by the Judgment of Divorce: it will sue both the husband and wife in order to get paid. As for the spouse that agreed to be responsible for the joint debt, although that spouse may have been well intentioned, if he or she cannot actually make the payments, he or she opens himself/herself up to continued litigation in family court.
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Joint Assets in Bankruptcy
Another reason to file bankruptcy before dissolution of the marriage is that joint assets may be better protected if owned by the married couple, rather than owned solely post equitable distribution. The Bankruptcy Code provides for a certain value of most assets to be "exempt" from creditors: Exempt property cannot be used to pay creditors. Each individual is able to assert their own exemption. In the instance of the primary residence for example, each spouse may exempt $21,165 in equity under the federal homestead exemption. If the home is transferred to only one spouse after the marriage, this doubling of exemptions would not apply. Thus, property that may have been protected before the divorce, may be a risk post-divorce.
Getting a Fresh Start Through Bankruptcy
Lastly, the point of bankruptcy is to give debtors a fresh start. Whereas, the root cause of many divorces is financial stress in the marriage, perhaps a fresh start may be all that is needed to keep the family together. Now the energy spent on worrying about paying creditors can be applied to saving the marriage.
If you are in a troublesome financial situation, talk to a consumer debt lawyer about how bankruptcy may help your financial situation.
