Bankruptcy & Divorce Article

Eric Stamps
Bankruptcy Committee-Member

WHICH COMES FIRST, THE CHICKEN (BANKRUPTCY)
OR THE EGG(DIVORCE)?

When a client is contemplating filing for both divorce and bankruptcy the age old adage “which came first the chicken or the egg” comes to mind. In the current economical climate, many people are filing both bankruptcy and divorce. It is important that each individual client be properly informed as to the consequences of filing for a divorce prior to bankruptcy or a bankruptcy prior to divorce. It is important for the divorce attorney to work closely with the bankruptcy attorney in determining 1) when it is appropriate to file each case , 2) whether the bankruptcy should be a joint or separate filing, and 3) which chapter of bankruptcy is best for that client. A general rule of thumb is for the clients to file a joint chapter 7 bankruptcy prior to their divorce. However, there are many issues that must be considered prior to advising the clients. As of October 17, 2005, when the new bankruptcy laws took effect, debts in a divorce or dissolution decree are not discharged in a Chapter 7. However, they are discharged in a Chapter 13. Additionally, debts related to support obligations, both child and spousal support, are not discharged in either a Chapter 7 or a Chapter 13.

ISSUES TO CONSIDER

1. Income of the parties
If the parties have significant income and continue to live in the same household it may be difficult for them to file a joint Chapter 7 bankruptcy prior to divorce. If the parties are in separate households or divorced, Chapter 7 may be possible.

2. Are both parties in agreement to filing bankruptcy
If the parties are not in agreement then a joint filing is not possible. A spouse is not required to file for bankruptcy and a bankruptcy will not be forced upon him or her. The party wishing to file bankruptcy may still be eligible to file and filing before the divorce may be advisable.

3. Are there any conflicts that require separate filings
In many cases, spouses have multiple joint debts including an automobile and/or home that ne party wishes to keep and the other wishes to eliminate their obligation. When a conflict arises the parties are required to file separate bankruptcies. In some instances it is better for one to file a Chapter 7 and the other to file a Chapter 13. The way the debts are allocated, whether marital, separate, or joint may also play a factor in determining whether a conflict exists.

4. Separate property of the spouses
If one of the parties has a significant amount of separate property through gift, inheritance, or premarital it may be important for the other party to file for the bankruptcy without involving the spouse with the significant property. You must then look at how the debt is allocated to determine whether or not the filing spouse should file the bankruptcy before or after the divorce.

5. Prior bankruptcy filings
If either spouse has filed a previous bankruptcy, hear she may not be eligible to file at that time. The following is a chart of eligibility time lines.

From Chapter 7 to Chapter 7 = 8 years
From Chapter 13 to Chapter 7 = 6 years
From Chapter 7 to Chapter 13 = 4 years
From Chapter 13 to Chapter 13 = 2 years

The eligible filing period starts on the date that the previous bankruptcy was filed and only comes in to play if a discharge was granted in the previous bankruptcy.

These are a few of many issues that need to be considered when determining whether the client should file bankruptcy or divorce first, whether they should file jointly or individually, and whether they should file Chapter 7 or Chapter 13.

CONCLUSION

In general, it is preferable that the clients file a joint chapter 7 bankruptcy prior to filing for divorce in order to eliminate as much of their debt as possible and thereby simplify the divorce process. However, due to the many issues to be considered in determining what is the best course of action, it is important for the divorce attorney and the bankruptcy attorney to work together to meet the needs of each individual client.