Sometimes divorce can lead to bankruptcy. Sometimes bankruptcy can lead to divorce. While both of these are overwhelming to endure alone, going through a divorce and a bankruptcy at the same time can be extremely stressful, costly and cause unexpected delays. If you have a significant amount of debt, one option you may be tempted with is to clear the slate by filing bankruptcy. If you are thinking about filing for divorce and bankruptcy, timing is critical. We have created this article to help you understand how personal bankruptcy can affect your divorce.
WHAT HAPPENS IN BANKRUPTCY?
First, before we dive into how bankruptcy can affect your divorce, it’s best to know the bankruptcy process. You must first seek credit counseling from an approved credit counseling agency prior to filing bankruptcy. The credit counseling agency will:
- Review your personal finances
- Give you alternative options other than bankruptcy
- Create a budget plan for you
Credit counseling can be done over the phone, online, or in person. You will receive a certificate when you complete your credit counseling course which will be used to file your bankruptcy.
Once you file the bankruptcy case, all of your property, except for pensions and educational trusts, becomes property of what is called the “bankruptcy estate.”
When you file either Chapter 7 or Chapter 13 bankruptcy, you will be appointed a bankruptcy trustee by the United States Trustee Program to handle your case. If you filed Chapter 7 bankruptcy, the bankruptcy trustee will liquidate your nonexempt property to pay off your debts. You get to keep all of your exempt property. The bankruptcy trustee’s job is to push your case through the system. One of the duties of the bankruptcy trustee is to conduct a 341 meeting of the creditors. A 341 meeting gets its name from section 341 of the bankruptcy code.
Next, the bankruptcy law requires you to complete a debtor education course. The purpose of this course is to help prevent you from filing bankruptcy in the future. Once you complete the debtor education course, you will receive a certificate of completion. You have 60 days after the 341 meeting to complete and file your certification of completion. If you do not file the certification of completion, the court will close your case and you will not receive your bankruptcy discharge.
If you filed Chapter 13, you must complete your debtor education course and file your certificate of completion prior to filing a motion for discharge. The court will dismiss your case if you miss the required deadlines. After the 341 meeting in Chapter 13 bankruptcy, your attorney must attend a confirmation hearing on your behalf. A confirmation hearing is when the bankruptcy judge determines if your repayment plan meets the requirements of Chapter 13. If your repayment plan is approved by the judge, you will able to start building credit again.
WHICH TYPE OF BANKRUPTCY SHOULD YOU FILE?
Chapter 7 Bankruptcy
The main goal of Chapter 7 bankruptcy is to give you a fresh start. Some debts cannot be discharged such as student loans, child support, alimony, and certain taxes. In Chapter 7 bankruptcy, there is no minimum or limit to the amount of debt you owe. There are however, income limits for Chapter 7 and you must take a means test to see if you qualify. There is no repayment plan in Chapter 7 bankruptcy like there is in Chapter 13. A benefit of filing for Chapter 7 is that if you file with an experienced bankruptcy attorney, it can happen quickly (within 60 to 90 days), but if you file during divorce proceedings, it can take months or even years.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is a court-supervised payment plan to pay back some or all of your existing debt. Many people file Chapter 13 because their income is too high to qualify for Chapter 7. Chapter 13 can be used to stop a foreclosure and will allow you to catch up on missed mortgage payments. Under this plan, you are required to pay your debt with disposable income until all of your creditors are paid back at least 1% of what you owe over a period of 3 to 5 years. In Florida, to qualify for Chapter 13, your unsecured debts, such as credit cards, student loans, and personal loans, must total less than $419,275. Secured debts, such as mortgages and car loans cannot total more than $1,257,850. In the event your debt exceeds these limits, you would file Chapter 11 bankruptcy.
WHAT HAPPENS IF YOU FILE BANKRUPTCY AND DIVORCE AT THE SAME TIME?
One of the biggest mistakes you can make is filing bankruptcy during the divorce proceedings. If you do, the judge in your divorce case will not be able to divide marital property between you and your spouse. You will be forced to wait until after the bankruptcy case is closed. Filing bankruptcy and divorce at the same time will cause a delay in your divorce case and if you have alimony and child support issues, it can cause a delay in your bankruptcy case.
If a married couple files bankruptcy jointly, and then one spouse files for divorce afterwards, the bankruptcy lawyer automatically has a conflict of interest because he or she now represents two opposing parties. The bankruptcy lawyer may have to withdraw from the case and you will have to hire a new attorney which will cost you more time, money and stress.
Keep things simple by completing either your divorce or bankruptcy case first. How do you know if you should file bankruptcy before or after your divorce? This answer depends on your current situation.
SHOULD YOU FILE BANKRUPTCY BEFORE YOUR DIVORCE?
Bankruptcy laws in Florida allow married couples to file a single bankruptcy petition together. If you and your spouse have collected debt throughout your marriage, you could both file bankruptcy together to discharge joint marital debt. This is a great solution if you and your spouse are on amicable terms. You will both be able to share the cost of attorneys and filing fees. Further, filing Chapter 7 bankruptcy before divorce makes the division of debt within the divorce proceedings very simple because there is none!
One factor to consider when filing jointly for bankruptcy prior to your divorce is you and your spouse’s combined income. Filing bankruptcy as an individual also requires the combined income of you and your spouse. If you and your spouse’s income is higher than the Chapter 7 income limitation in your state, you won’t be eligible to file Chapter 7 bankruptcy. You will have to file Chapter 13 bankruptcy instead. You and your spouse will be responsible for making payments on the debt that you both owe. Filing Chapter 13 before a divorce is not favorable for some people because it takes 3 to 5 years to complete the payment plan. It is best to have an experienced bankruptcy lawyer review your case completely prior to filing.
SHOULD YOU FILE FOR BANKRUPTCY AFTER YOUR DIVORCE?
If you and your spouse are not getting along and you must divorce immediately, it is best to file for divorce first. Allow the divorce case to close before filing bankruptcy. Filing bankruptcy after divorce has its pros and cons. A benefit of filing Chapter 13 bankruptcy after your divorce is that you can retain more of your property. Also keep in mind that if you file bankruptcy after your divorce, you will both have to file individually and each of you will be responsible for your own costs and legal fees. Filing individually, however, can benefit you if your income alone is below the threshold within Chapter 7 bankruptcy in your state. Some people prefer Chapter 7 bankruptcy because it is faster than Chapter 13 and you do not have to make payments.
Because Florida is an equitable distribution state, the property you have accumulated during marriage between you and your spouse is divided equally. If you and your spouse have divorced first and you have filed bankruptcy afterwards, each of you are still responsible for certain debt such as credit cards or loans while you were married. Filing bankruptcy after your divorce may not discharge those debts. One thing to note is that if your spouse files bankruptcy after your divorce and you have joint debt together, creditors may attempt to contact you to pay your spouse’s portion since both of your names are on the account.
Personal bankruptcy can affect your divorce in many ways. The timing of when you file for bankruptcy around your divorce is critical. It is best to consult with a divorce and bankruptcy attorney before you make any decisions.
Trying to navigate a divorce and a bankruptcy can be complex, frustrating, time consuming and costly. Klein Law Group has compassionate divorce and bankruptcy attorneys that are here to help you develop a plan so you can start your life fresh the right way. Our areas of practice include alimony, complex/high net worth divorce, contested divorce, parental relocation, property division, and more.
Call us now at 1-561-353-2800 or contact us online for a free 30-minute consultation. We have over 25 years of experience and can assist you with your divorce and bankruptcy for the best possible outcome.