Divorce and Bankruptcy: What You May Expect
Divorces can be extremely stressful on a family, and not only because of the emotional issues involved.
Between legal fees, moving and spreading one household’s income over two homes, divorce can cause serious financial troubles.
Filing for Bankruptcy After Divorce
Some Americans find that bankruptcy offers them the protection they need after a divorce.
Bankruptcy was designed to help protect property from foreclosure and repossession and resolve debts.
The U.S. Bankruptcy Code offers two main types of personal bankruptcy protection: Chapter 7 and Chapter 13.
Read to see what you may expect if you decide to file bankruptcy after splitting with your spouse.
Chapter 7 Bankruptcy
This type of personal bankruptcy offers filers a complete discharge (elimination) of unsecured debts, which includes:
- credit card debt
- utility bills
- medical bills
- payday loans
- most other debts not tied to property
Chapter 7 typically works best for those who own little property beyond the essentials and who cannot afford to make regular monthly payments, which is required under the Chapter 13 repayment plan.
This type of bankruptcy may require your bankruptcy trustee to sell some of your non-essential possessions to raise money to pay your creditors; but, no need to panic—in many cases, the debtor can keep all of his or her property.
Chapter 7 cases move quickly and tend to finish within six months.
Chapter 13 Bankruptcy
The other type of personal bankruptcy, Chapter 13, allows filers to catch up on their overdue debts while paying current debts.
Each month, the filer makes one lower monthly payment directly to the bankruptcy court for a period of three to five years until they’re caught up on most of their secured debts.
At the end of the repayment period, if all payments were made on time, the bankruptcy court may discharge the rest of the filer’s unsecured debts.
Chapter 13 tends to work best for those with a steady income who have significant, non-exempt property they fell behind on paying for but want to keep.
You may want to ask your bankruptcy lawyer about how filing for bankruptcy could affect your ex-spouse. Consider these bankruptcy-divorce overlaps:
- If your divorce settlement included a division of jointly held debts and one spouse has a joint debt discharged in a bankruptcy filing, the other spouse may still be responsible for paying it.
- If you and your spouse co-signed on debts, a non-filing cosigner will likely have to pay any debts excused in bankruptcy.
Not All Debts Can Be Discharge in Bankruptcy
Of chief concern to many divorcees are child support and alimony payments (or “maintenance”).
But neither of these financial obligations is dischargeable in bankruptcy, which means that whether you or your spouse files bankruptcy, the party responsible for making maintenance and support payments typically can’t be relieved of that responsibility.
This comes as a relief to some ex-spouses worried about receiving ongoing support for children and themselves.
In addition, there are some other types of debt that typically can’t be discharged, which include:
- most tax debts
- most student loans
- DUI fines
- other criminal fees and penalties
If your financial troubles stem from these types of financial obligations, you may have to find another alternative to resolve your debt; but be sure to talk to a bankruptcy lawyer about your specific situation, because there may be some exceptions.
Effects on Your Ex-Spouse
The way your bankruptcy affects your spouse will depend largely on whether your state has community property or equitable distribution laws, whether you file for Chapter 7 or Chapter 13 bankruptcy, how many of your debts are jointly held, what types of debt you have and a few other factors.
A bankruptcy lawyer practicing in your area can help you sort out these details and figure out how the bankruptcy court can best offer you the financial protection you need.