Filing for Bankruptcy When Getting Divorced

 Posted on September 15,2017 in Divorce Finances

Spouses share their debts during a marriage. When they decide to divorce, those debts are split between the two sides, with each spouse taking responsibility for paying a portion of the debt. However, creditors hold divorced spouses equally liable for their marital debts, regardless of the terms of the divorce settlement. If one divorced spouse fails to pay his or her share of the debt, the creditor will go after both spouses. A couple facing overwhelming debt can file for bankruptcy to either discharge the debt or create a repayment plan. Bankruptcy may allow a divorcing couple to reduce or eliminate the shared debt that will tie them together after their marriage has ended. Couples should consider filing for bankruptcy before they divorce.

Types of Bankruptcy

People most commonly file for either chapter 7 or chapter 13 bankruptcy. The differences between the two may determine which type a divorcing couple prefers and when they want to file:

• Chapter 7 bankruptcy liquidates the debtor’s properties to pay the creditors. The remaining debt is discharged, and the process typically takes three months. In order to qualify, the applicant usually must have a household income that is below the state average.
• Chapter 13 bankruptcy establishes a plan for the debtor to repay the creditor in full, which typically takes three to five years.

Joint Filing

The most attractive option for divorcing couples is to jointly file for chapter 7 bankruptcy before they divorce. The process is relatively quick, after which they will no longer need to worry about dividing the debt as part of the divorce. Filing jointly also allows them to use more exemptions to protect property during the liquidation process. A couple can file for chapter 13 bankruptcy before getting divorced, but the bankruptcy court will be allowed to dictate the terms of the division of property. The alternative is to complete the chapter 13 bankruptcy before divorcing, which means delaying the divorce for several years.

Individual Filing

A couple’s combined incomes may be too great to qualify for chapter 7 bankruptcy, but their individual incomes after divorce may allow them to file on their own. In some cases, the individual parties still make too much money to qualify for chapter 7 bankruptcy. If chapter 13 bankruptcy is the only option, it may be better to file individually after the divorce is finished. It will require cooperation between the former spouses to agree and adhere to a repayment plan. However, filing jointly will delay and complicate the divorce.

Divorce and Bankruptcy

Filing for bankruptcy in the middle of a divorce will freeze your properties until the bankruptcy case is settled. If you are considering both divorce and bankruptcy, it is important to plan when you will take each action. A Kane County divorce attorney at Goostree Law Group can discuss your options for managing debt during your divorce. Schedule a free consultation by call 630-584-4800.

Source:

https://www.illinoislegalaid.org/legal-information/chapter-7-bankruptcy

https://www.illinoislegalaid.org/legal-information/chapter-13-bankruptcy