I often work with David M. Offen, Esq., a bankruptcy attorney in Philadelphia, PA. Together with colleague Katherine K. Wagner, Esq, a Somerset County, NJ family law attorney, we present this quick guide to Divorce and Bankruptcy.
Veronica Baxter: If a couple needs to file bankruptcy, should they file before, after, or during their divorce?
David Offen: The timing of the bankruptcy depends upon why the couple needs to file, in my opinion. Do they need to surrender a jointly-owned car or home they can’t afford? Do they need to file to discharge joint credit card debt? Or, perhaps one of the two needs a discharge of the unsecured debt or to surrender a car or a house?
If a divorcing couple needs to discharge joint debt or needs to surrender jointly-owned secured property of any kind, then in most cases they should file before the divorce because bankruptcy law dictates that you can only file a joint petition if you are legally married. They could always file separately but that would involve paying the fees and preparing the paperwork twice!
If the impetus for a bankruptcy filing is the debt of only one of the parties, then the individual filing can happen before, during, or after the divorce.
Katherine Wagner: Divorcing couples should keep in mind that filing a bankruptcy petition with a bankruptcy attorney during divorce proceedings will delay the divorce due to the imposition of the automatic stay, which “stays” or stops all court proceedings including the divorce.
VB: How does a couple know whether to file jointly or as individuals?
KW: I can answer this one. Couples need to first consider what sort of working relationship they have – obviously, they are having problems in their marriage if they are contemplating divorce. At this point, they should consult with a divorce lawyer. If the couple can communicate civilly and together as a team, they can consider filing a bankruptcy petition jointly.
DO: I agree wholeheartedly with that. Regardless of the financial situation, if a couple cannot work together then they should not file a joint petition. But if they can, filing jointly while still married streamlines the process and costs half what it would if they filed individually. You have attorney’s fees, the court filing fees, the fees for the credit counseling course, and the debtor’s education course each debtor must take… filing jointly saves a lot.
VB: What should a couple consider when trying to figure out whether to file Chapter 7 bankruptcy or Chapter 13 bankruptcy?
DO: The couple should consider why they need to file, and what their goals are in filing bankruptcy. If the couple has mostly credit card debt and medical bills, which is called unsecured debt, and the couple’s assets and income do not, when combined, exceed the Chapter 7 limits, Chapter 7 might be best.
For your reader’s information, Chapter 7 bankruptcy is a four- to the six-month process by which a debtor discloses all income, assets, expenses, and debts in his or her petition and schedules. If all goes well the debtor receives a discharge of his or her unsecured debt, meaning, he or she is no longer personally liable for that debt.
A Chapter 7 debtor can also surrender a car or home that he or she can no longer afford, and be discharged of that debt entirely.
Here’s where the timing of the filing is important. Let’s say that jointly, the couple’s income and assets make them ineligible to file under Chapter 7. If they wanted to file a joint bankruptcy petition, they would have to file under Chapter 13 which requires a 3-5 year partial repayment plan followed by a discharge. However, following divorce, the couple’s income and assets individually may allow them to file under Chapter 7 instead. Here’s where you consult with your bankruptcy attorney as to which timing would be best for you.
KW: That is exactly what I counsel my clients to do because bankruptcy strategy is so fact-specific. One thing my clients have been able to do through bankruptcy is to cure mortgage arrears when one party wants to keep the marital home. A Chapter 13 filing allows that person to repay the arrears over time.
DO: In that case the couple needs to bear in mind that if one or both of them file a Chapter 13 case prior to divorcing, this delays their divorce for that 3-5 year period.
KW: Yes, that’s right. In my most recent example of this, a divorced mother of 2 was able to save her family home with a Chapter 13 filing after she and her husband divorced.
VB: What if only one spouse files a bankruptcy petition?
DO: If one spouse files bankruptcy and the soon-to-be-ex does not, the non-filing spouse will still be on the hook for any joint debt unless he or she files their own bankruptcy case. Remember, this delays the divorce!
KW: But I’ve seen this happen in really contentious divorces where the parties cannot work together and frankly, do not care about what happens to their ex. In that case, the non-filing spouse ends up filing bankruptcy too just to get that joint debt discharged. It’s a mess. If there is any chance a couple can cooperate, filing jointly is the way to go.
DO: I agree, especially in the case of joint debt.
Veronica Baxter is a writer, blogger, and legal assistant operating out of Philadelphia, Pennsylvania.