How Filing Bankruptcy After Divorce Affects You (and your ex)


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Divorce is one of the main reasons why people file for bankruptcy. After all, splitting debts, bills, and income can significantly alter the lifestyle of both people. But if you’re facing a financial challenge here’s what you should know about filing for bankruptcy after divorce.

Generally speaking, filing for bankruptcy is more advantageous if done before divorce. This makes the division of assets simpler. However, a Chapter 7 bankruptcy is typically better done after divorce as there is an income threshold that will now be lower.

But always consult a divorce attorney or financial advisor before making a decision like this.

Couples tend to have a lot of shared responsibilities, like funding their kid’s college, mortgage payments, utility bills, and even shared debts. After a divorce, both parties are no longer husband and wife, and these shared responsibilities have to be done individually.

Based on their income, meeting their needs and paying these expenses may become a financial burden, forcing one or both parties to file for bankruptcy to ease certain duties or support obligations.

In the course of this article, I will discuss some of the ups and downs of filing for bankruptcy, and the difference between both chapters of filing for bankruptcy.

But we’ll also look at when to file for bankruptcy, the importance of seeking legal advice by involving a divorce lawyer, and many more important things to know about filing for bankruptcy.

Before we dive in, we have to know where we’re starting from.

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Why do people file bankruptcy after divorce?

People file for bankruptcy due to the inability to pay certain unsecured debts or financial responsibilities imposed on them.

In regard to divorce, there are many reasons why one’s spouse will file for bankruptcy after their separation. Once you consider having a divorce, be ready for a lot of expenses throughout the whole process.

The legal fees involved are extremely expensive for both parties.

In most cases, you must consider attorney fees and filing fees. Still, one of the common reasons why people file for bankruptcy is to get a cost reduction on Alimony and to try to waive paying their child support.

Depending on the state, Alimony costs around 40% of the paying party’s income. Considering these fees, one may even go bankrupt after paying, so people file for bankruptcy to prevent this.

As for child support, the court may order the parent with whom the child does not live to pay a certain portion of their income as child support.

However, domestic support obligations are not eligible for a bankruptcy discharge, but you can receive bankruptcy help for due child support payment if you file under chapter 13 of the bankruptcy code.

These are some of the reasons why people file for bankruptcy after divorce, financial problems tend to occur, and this burden may be too much to bear for an individual.

Depending on the situation and what chapter of the bankruptcy code you and your bankruptcy lawyer choose to file under, there’s always a way around relieving you of the financial responsibilities you may have.

Is it better to file for bankruptcy before or after divorce?

Filing for bankruptcy before or after a divorce depends on many factors.

However, it is important to seek legal advice from a bankruptcy attorney and a divorce lawyer to assist in deciding whether to file for bankruptcy before or after the divorce and to inform you about other legal options.

When you file for bankruptcy before the divorce, it has a few advantages, but this is limited to the terms of your divorce. If you and your spouse agree to file for bankruptcy before a divorce, this becomes a joint bankruptcy case, and you may incur fewer fees, meaning you might only pay for the filing fees once instead of paying separately.

Filing for bankruptcy first will make the property division aspect of your divorce case easier.

In addition, if you and your spouse secure a bankruptcy discharge on your unsecured debts, neither of you will have to pay the creditor once you receive a discharge. If you do not obtain a discharge of debt through bankruptcy, the creditor can decide to secure his payment from either one of the parties, regardless of the family court order.

Filing for bankruptcy after divorce works well for both parties that can’t get along before the divorce proceedings.

Suppose you also want to file a Chapter 7, also known as liquidation bankruptcy, to ease your unsecured debts. In that case, it is advisable to file for bankruptcy after the divorce and separately, in situations where your joint income might be too high to pass the means test, to qualify for Chapter 7.

Individually, your income might meet the requirements.

To conclude, the terms of your divorce play an important role in whether or not you should file for bankruptcy before or after a divorce.

Will bankruptcy affect my ex-wife?

Bankruptcy can affect your ex-wife in different ways.

If you have a joint debt, once you file for bankruptcy after divorce, your ex-wife may be made to pay the rest of the joint debt. This is because you only have bankruptcy protection, but your ex-wife would not be protected.

The creditor has every right to demand payments from your ex-wife, which may be a financial burden to her and will undoubtedly lead to financial hardship.

A credit card debt would be an example of a dischargeable debt when you file for bankruptcy. Other dischargeable debts would be mortgage payments or vehicle debts.

However, if your ex-spouse files for bankruptcy, she would not be able to pay the outstanding joint debts, and she would have the creditors on her neck.

If you both file a joint bankruptcy, you are both protected from paying certain debts. If you are worried that your filing for bankruptcy might affect your ex-spouse, you can ask your lender for a division of debts, so the burden wouldn’t be placed on her depending on the kind of marital debt.

If you have jointly secured marital assets, such as a car or family home, or marital property, you may be able to cut a deal with the creditors to keep the assets until you can pay, or it may be sold to pay off your debts, and that’s a good idea.

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Does bankruptcy clear child support debt or spousal support?

After a divorce process, depending on the terms of the divorce and how the divorce court adjourned the divorce case, you might be asked to pay child support to your ex-spouse as well as spousal support. These terms and payments are based on the decision of the court about who has child custody.

With the help of a divorce attorney, your options will be laid out for you.

Nevertheless, these payments may be overwhelming and pile up until you start to get late with them, leading to debts. You might want to look into bankruptcy filing to waive these debts or reduce the amount of money paid.

Well, without the help of a bankruptcy attorney, you can’t achieve any possible solution, so the first step is to get one.

Children need financial support from both parents even when there is a bankrupt spouse. However, if you are a noncustodial parent who has filed for bankruptcy, your child support payments cannot be waived.

As for spousal support, if the terms of the divorce or separation agreement agree to give one spouse a marital asset in return for paying spousal support, if the paying spouse files for bankruptcy, they might lose total obligations to the asset.

You can agree with your spouse, who is supposed to receive spousal payments, make a claim in your bankruptcy file, to receive a share of any dividend paid from the bankruptcy estate.

Do you think money issues can ruin a relationship? Yes or no?

Find out in a recent article I published. I get into the actual statistics of how money impacts relationships as well as the 1 financial decision most couples make that double the chances of divorce.

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What is the difference between Chapter 7 and Chapter 13 Bankruptcy?

Chapter 7 bankruptcy is also known as liquidation bankruptcy.

It involves selling some of your property, whether it is your marital or personal home. In this type of bankruptcy, depending on where you live and your marital status, when you file for bankruptcy, you may be allowed a property exemption amount or other exemption amounts on personal belongings and possessions like expensive jewelry.

Chapter 7 looks deeply into your financial situation and checks if your disposable income is low enough to pass the chapter 7 means test. It takes about 3-5 months to receive a discharge.

The bankruptcy trustee may also decide to pay creditors with sales of non-exempt property.

The chapter 13 bankruptcy code, however, is a type of bankruptcy that involves a repayment plan for debts, and this plan lasts between 3-5 years. This type of bankruptcy allows you to keep your property, including assets like your home and car.

It is also known as reorganization bankruptcy, which does not affect your property, provided that you pay all unsecured creditors an amount equal to the value of nonexempt assets over a long time, between three to five years. However, there are certain types of debts that may not be exempted.

Debts like mortgage payments, child support, or alimony payments.

With the current recession happening in the US, knowing how to budget is becoming an essential skill. In a recent article, I wrote a few tips on how to budget money for a low income.

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When Divorce & Bankruptcy Collide, with Janice Boback

Conclusion

Finances are one of the main reasons why couples get into a divorce, and after the divorce decree, one party is often faced with the challenge of paying a lot of bills.

The divorce settlement is an important decision maker in knowing whether or not to file bankruptcy with the advice of a bankruptcy attorney and a divorce attorney.

This article explains in detail the essential things you need to know when filing for bankruptcy and the exemptions you may have access to. And money issues don’t always end if you divorce. Sometimes a wife will try to claim their spouse’s retirement money years after the divorce!

Before we dive in, we have to know where we’re starting from.

If you don’t have a current copy of your credit report, then you might want to get one to really see what’s on there and how much all your outstanding debts really are.

Luckily, myFICO can get you access to your credit score and a copy of your credit report from all 3 credit bureaus (Equifax, TransUnion, and Experian)!

But myFICO does more than just get you a credit report. With their credit simulator, you can see how possible financial choices (such as bankruptcy) will affect your credit score in the future!

Get your 3 bureau report today and save 20%!

Learn more over at myFICO and get started today (just click the link to see all the details on their site).


Image by Gerd Altmann from Pixabay and Image by OpenClipart-Vectors from Pixabay


While I have years of successful financial & budgeting experience and run several million-dollar businesses and handled the accounting, P&L and been responsible for the financial assets of them, I am not an accountant, lawyer, or CPA. Like all my posts, my posts are opinions based on experience, observations, research, and mistakes. While I believe all my personal finance posts to be thorough, accurate, and well-researched, if you need financial advice, you should seek out a qualified professional in your area.

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