The Consequences of Filing a Chapter 7 Petition before a Divorce
Unfortunately, one of the commoner causes of divorce is financial difficulty. Conversely, divorce is often a contributing factor to a bankruptcy filing. As a consequence, it’s not that unusual that a party to a divorce also becomes a party to a bankruptcy. But which should come first, particularly if you are seeking to discharge debts permanently under Chapter 7? The short answer: it all depends, but making the wrong decision can be disastrous.
A Chapter 7 bankruptcy filing can be extremely attractive to many people, as it allows you to wipe out certain debts, subject to the sale of property with non-exempt value. Whether you want to file a Chapter 7 before or after your divorce will depend on many factors and requires a careful analysis by an attorney working with your divorce attorney. Here are some of the questions that need to be answered:
- How much debt do you have?
- How much is joint debt?
- What are your and your spouse’s income situations?
- Will there be alimony or support to be paid? Will this be made easier by a discharge of other debts?
- What property do you own? Who is going to get what as part of any property division?
- Do you or your spouse have any ability to pay debts over and above support payments and basic living expenses?
- What are the risks and benefits of a bankruptcy filing to each party? Does it make sense to wait until after the divorce is final?
- Are the spouses cooperative or antagonistic? Realistic about their financial prospects?
- Should a joint bankruptcy be filed? (If so, it is likely at least one spouse will have to have a separate bankruptcy attorney involved to review what is being prepared and submitted)
One of the more expensive and time-consuming aspects of a divorce can be the division of marital debts. If you have credit card or similar debt when you file for divorce, you can spend a lot of time and money litigating who will be responsible for what part of that debt.
If there is property with significant value to be divided in the divorce (other than pensions) careful consideration needs to be given to waiting until after the divorce is final. On the other hand, if you file for protection under Chapter 7 before your divorce is final, you may be able wipe out all credit card debt and significantly reduce the expense of completing your divorce. But if this leaves your spouse jointly liable after your bankruptcy discharge, the problems may not go away.
When and how to file a bankruptcy when a divorce is involved is complex. Filing a bankruptcy at the wrong time might easily backfire. A bankruptcy exposes all your financial dealings to scrutiny. Filing in order to get back at a spouse is generally a poor reason to file a bankruptcy; indeed, we have had cases where the spouse’s bankruptcy benefitted our client (the non-filing spouse) greatly.
If there is collusion in dividing property in a lop-sided fashion to avoid paying creditors, a bankruptcy can open up the entire process of negotiations to unwanted scrutiny by a bankruptcy trustee, and possibly a lawsuit to get back property fraudulently transferred. This is one of the considerations that a thorough review by a qualified bankruptcy attorney will deal with.
In a bankruptcy, unpaid alimony, support or other Domestic Support Obligations get highly favorable treatment. These debts cannot be discharged, and once a bankruptcy is filed, you will have to remain current on them.
The best course of action is to consult with an experienced bankruptcy attorney who is also knowledgeable about your state’s divorce laws. (Our office has extensive experience in both areas). The first meeting should not include your spouse or his attorney, but having your divorce attorney sit in may be a very good idea.
Handled properly, a bankruptcy may well ease the difficulty and expense of a divorce, benefitting everyone. Handled wrong, it can make a bad situation significantly worse for everyone involved.
Contact Neuner & Ventura, LLP
At Neuner & Ventura, LLP, we know the personal challenges that come with a potential bankruptcy filing. We offer a free initial consultation to every client. We do, however, reserve the right to charge a fee to review any work done by another attorney.
Representing Clients across South Jersey