When Should You Declare Bankruptcy?
Whether you declare bankruptcy before, during or after a divorce truly depends on your circumstances. The decisions that you make about when to file bankruptcy and whether to do so as a couple before divorce are highly personal. It is about what is best for you in your current reality, and there is no right or wrong answer. You are the best judge of your priorities and goals but you can always discuss your specific circumstances with an attorney, legal aid or non-profit like Upsolve to thoroughly explore all of your options and help make the right decision for you. Below we will go over the different timing and order options along with their pros and cons.
Bankruptcy Before Divorce
There can be some significant benefits to filing bankruptcy before a divorce, particularly if you qualify to file jointly for Chapter 7 (a liquidation bankruptcy.) First, you can save on court fees by only filing one case, which will save on attorney fees (generally $900 to $1500 per case) as well as administrative fees ($335 filing fee) from the court. Second, you will be able to discharge some (or all) “marital debt.” This may be very relevant as marital debt encompasses any debts incurred during the period of the marriage. This is most often an issue with health issues. If your spouse had a medical crisis while you were married, you are likely still liable on those medical bills even though you were not the one being treated. Third, getting rid of your debts may make the division of assets in your divorce easier since you will not have to account for most (or all) of the debts. Finally, you might be able to protect more property by filing together. You can protect property in bankruptcy through using exemptions. Many states will allow a married couple filing jointly to double most of the exemptions which result in more property being protected overall.
Despite the benefits discussed above, there are also potential downsides to consider. Filing jointly will only work if you have a decent relationship with your spouse as you will need to work together on your joint bankruptcy case. This may not be the case, however, as many couples who are considering or planning to divorce are making that choice precisely because they do not have a good relationship with one another. If continuing contact with one another to complete a bankruptcy case is going to cause more heartache and emotional turmoil, it might not be worth it.
Bankruptcy During Divorce
Filing bankruptcy during a divorce is an option, but generally should be avoided if at all possible. The reason for this is the automatic stay. When you file a bankruptcy case the automatic stay goes into effect as soon as you file and stops most other court proceedings. This can be great news in terms of avoiding foreclosure, repossession, or garnishment from a creditor, but it will also stop the divorce in its tracks until the bankruptcy case is over.
Bankruptcy After Divorce
Filing your own Chapter 7 after the divorce is complete might be the better option if you and your spouse are not on good terms. This will allow you to put the marriage behind you as quickly as possible and then give you the chance to address your financial situation. To qualify for a Chapter 7 case you need to pass the Means Test. You can qualify in one of two ways, either based on income thresholds, (being less than the median income for your area and family size,) or by an in-depth calculation of your income and expenses for the month, showing that there is little to no money left. It could absolutely be the case that you and your spouse do not qualify to file jointly, but after doubling all your living costs by separating you could both qualify for Chapter 7 independently.
Chapter 7 vs. Chapter 13
There are different types of bankruptcies available. The most common types for individual (or married filing jointly) consumers are Chapter 7 and Chapter 13. Chapter 7 is what you think of as a typical bankruptcy, also referred to as a liquidation. In Chapter 7, you can walk away from some (and possibly all) of your debt and get a fresh start. Chapter 7 will discharge all of your unsecured debts (debts that are not tied to any specific property. ) The most common examples of unsecured debts are medical bills and credit card bills. There are, however, debts that are non-dischargeable, which means that despite filing for bankruptcy relief you are still obligated on these payments. Non-dischargeable debts are most often child support or alimony payments, which can be a large issue in a divorce. Even with a liquidation bankruptcy, you are likely able to keep most (or all) of your personal property. Chapter 7 will typically last between four and six months, and at the end when you receive your discharge you will no longer be obligated to pay the bulk of your debts.
Chapter 13, on the other hand, tends to be more complex. Chapter 13 involves a repayment plan (similar to a business Chapter 11) that will run between a minimum of three and a maximum of five years. You are most likely to consider Chapter 13 if you are behind on a secured debt, like your house or car, that you want to keep and want to have an opportunity to catch up on your obligations. If your primary reason to file Chapter 13 is to protect an asset you may need to decide between the value (both monetary and emotional) of the asset and the delay of moving on with your life.
Bankruptcy & Divorce Costs
There are costs associated with any type of legal action. Some costs are fixed and can be predicted, such as bankruptcy filing fees. The filing fee for Chapter 7 is $335 and the filing fee for Chapter 13 is $310. Since bankruptcy is a federal law, the filing fees are consistent across the country. There is much more variability with concerning attorney fees for each case, but we could generalize that Chapter 7 will be between $900 and $1500 (although it can be higher if there are complex issues to address.)
Chapter 13 will cost somewhere between $3,000 and $4,000 in attorney fees just to get the plan in place. It is also important to note that the estimated attorney fees are for getting the plan confirmed and running, so any additional legal fees incurred during the three to five-year plan will be additional costs and billed at an hourly rate. Attorney fees for Chapter 13 are paid through the plan, which means that you are not out-of-pocket additional money, but that creditors in your plan may need to wait longer for their payments. You can also look to legal aid organizations to help you with your bankruptcy to save on attorney fees for either chapter.
For divorce, there is much more variability among all of the costs. To begin, each state will have its court filing fee which can range between $70 (Wyoming) and $435 (California,) the national average being $300, so that will depend entirely on where you reside. Next, attorney fees also vary, although several studies show that the national average hourly rate for divorce attorneys is $250 per hour. Here you can see that the attorney fees will increase the longer it takes to come to a resolution. The national average cost of divorce is approximately $15,000 per person, which includes attorney fees, court costs and any fees for any outside experts. This cost can be drastically reduced when the parties have already resolved most issues. If the divorce is uncontested, meaning both parties are in agreement with the dissolution of marriage, property settlement, custody arrangement (if any) and support payments (if applicable) then the average cost for a divorce lawyer drops down to about $1,000. This is, however, not always possible due to the circumstances and if the parties are not in agreement and require mediation or court hearings to resolve matters the attorney fees will add up quickly. Here again, you can seek assistance from legal aid organizations for help in your divorce to save on fees, but that might not result in the type of representation you prefer.
The decisions that you make about when to file bankruptcy and whether to do so together with your spouse, as well as the decision to divorce, are highly personal. Both types of relief are available for you to pursue, in whichever combination and order you choose. You are the best judge of your priorities and goals but you can always discuss your specific circumstances with an attorney, legal aid or non-profit like Upsolve to thoroughly explore all of your options and help make the right decision for you.
This article was written by the bankruptcy experts at Upsolve. Learn more at Upsolve.org.