Everything You Need to Know About Filing Bankruptcy After Divorce
Divorce is a common reason for filing a bankruptcy case. Many people who have gone through a divorce experience financial problems. They may have difficulty paying bills with a single income or have trouble paying bills because of their domestic support obligations.
Regardless of the reason for filing bankruptcy after divorce, it is essential to discuss the bankruptcy filing with your divorce attorney. It is equally important to discuss your divorce with your bankruptcy lawyer. The terms of your divorce could impact your bankruptcy case.
What Happens to Domestic Support Obligations in a Bankruptcy Case?
Some people believe they can get rid of their spousal support or child support payments by filing bankruptcy. This assumption is incorrect. Domestic support obligations are not eligible for a bankruptcy discharge (debt forgiveness).
However, you can receive bankruptcy help for past due alimony or child support payments if you file under Chapter 13 of the Bankruptcy Code.
A Chapter 13 bankruptcy is a repayment plan. The repayment plans last from three to five years. Debts that are not eligible for a discharge must be paid in full through the Chapter 13 plan.
Therefore, you can include past-due alimony payments or child support payments in your Chapter 13 plan. If the plan is for five years, the payments can be divided into 60 monthly payments.
By filing a Chapter 13 bankruptcy case, you could avoid going to jail or other punishments for failure to pay child support or alimony payments. However, you must make all future domestic support payments on time to remain in Chapter 13 and avoid family court sanctions.
What Happens to Joint Unsecured Debts in a Bankruptcy Case?
If you and your ex-spouse owed joint debts, those debts are included in your bankruptcy case. Your ex-spouse receives notice of the bankruptcy filing as a joint debtor.
In a Chapter 7 case, most unsecured debts are discharged. Examples of unsecured debts you can get rid of in Chapter 7 include medical bills, credit cards, personal loans, some old tax debts, most personal judgments, and old utility or rent payments.
In a Chapter 13 bankruptcy case, unsecured creditors are paid a portion of the debt you owe. The percentage paid to unsecured creditors depends on several factors, including your income, expenses, and debts. When you complete the Chapter 13 case, the remaining amounts owed to unsecured creditors are discharged.
Your bankruptcy filing does not discharge your ex-spouse’s legal liability for an unsecured debt. If your ex-spouse were a co-debtor, the creditor could sue your ex-spouse to collect the remaining portion of the debt.
If your divorce decree states that you are responsible for paying certain debts, that order could impact your bankruptcy filing. A bankruptcy filing does not negate a family court judge’s order. You might be legally released from repaying the debt to the creditor after filing bankruptcy, but you might still be liable for the debt through the divorce.
When you meet with a bankruptcy attorney, make sure to take your divorce order and any other documents related to co-debts with your ex-spouse. Your bankruptcy lawyer may contact your divorce attorney to discuss the best strategy for obtaining debt relief.
Secured Debts in a Bankruptcy Case
If you owe money on a loan secured by a car, home, or other asset, you must continue paying the debt if you want to keep the property. There are limited instances in which you could pay a sum equal to the property’s value to release the loan.
In a divorce, you could be ordered to continue paying a car loan or mortgage payment as part of your property division agreement. As with unsecured loans, the bankruptcy case could release you from the debt, but it may not release your obligation under a family court order.
You Might Qualify for Chapter 7 After Your Divorce
If you and your spouse discussed filing bankruptcy before the divorce, you might have discovered that your income was too high for a Chapter 7 bankruptcy. However, after your divorce, you could qualify for a Chapter 7 case based on your income.
A Chapter 7 bankruptcy is a liquidation bankruptcy case. You do not enter a repayment plan for your debts. Any debts that are eligible for a discharge are eliminated when you complete the Chapter 7 case.
However, you could lose some of your property in Chapter 7 if you have assets with a high net value. A bankruptcy lawyer can review your property and advise you of any risk of losing property in Chapter 7.
Should I File for Bankruptcy Before the Divorce?
Some individuals consider a bankruptcy filing before the divorce. Filing bankruptcy before a divorce could be a good idea if you and your spouse owe a lot of debts. You might be able to file a joint bankruptcy while you are married to discharge the debts.
The one thing to remember is that you need to discuss any options with both of your attorneys before taking any action. Once you file a bankruptcy case, you may not be able to dismiss the case without adverse consequences. Talking to your divorce lawyer and a bankruptcy attorney can help you make the best decision for your situation.