Your Legal Rights at Work

The Bankruptcy Divorce Conflagration

by Lewis Hamilton

If your marriage is in as bad of shape as your financial situation is, you may be in for two major legal moves in a short period of time. The question may not be if they should happen, but which should happen first—the divorce or the bankruptcy. You should know that the timing of these two issues are important, so read on to get a better idea of how they each affect another and how the order of filings could matter so much to you.

The debt burden is overwhelming

If you owe so much money to so many, and are falling behind on your bills, you may want to consider addressing the bankruptcy issue first. It's no surprise that both marital strife and marital debt are often interconnected, and the issue of who pays what debt can be among the most contentious of issues in a divorce. You can take that issue off the drawing board for your divorce if you go ahead and file a chapter 7 bankruptcy prior to your divorce filing.

Your property could be seized

There are two types of debt when it comes to bankruptcy, unsecured and secured. Secured debt is connected to property, such as the way a home is secured by a mortgage debt. Since the property you own is considered marital property in a divorce situation, the filing of a bankruptcy prior to a divorce could impact your divorce property settlement in a big way. If you have a home, cars, or other secured debts that might affect your divorce, speak with a divorce attorney before you file for bankruptcy. Even if the divorce takes place first, any property given to either party in the divorce settlement could raise the interest of the bankruptcy trustee, since there are rules about "shedding, transferring or selling" property before a bankruptcy filing.

Double dipping on exemptions

Every state uses exemptions to help bankruptcy filers keep some of their property, and in some states you can double the amount of the exemption if you file jointly. If you find yourself in the position of potentially losing property through a bankruptcy filing, you should consider waiting until after your bankruptcy to file for divorce.

Income matters

Not everyone is eligible to file for bankruptcy. If you make too much money, you may be prevented from filing. The actual amount allowed varies by state and is based on the state's median income. This rule came about in a response to repeat filers who had the means to pay their bills but were taking advantage of the bankruptcy code to avoid paying their debts. Consequently, your income must fall below a certain amount; the income of your spouse is taken into consideration even if you are filing singly. If your joint income is too high, you may want to go through with the divorce first and file on your own.

Speak to a debtor lawyer or your personal attorney for more information.