Bankruptcy and Divorce

The Intersection of Divorce and Bankruptcy

Making the decision to proceed with a divorce can be an incredibly taxing and overwhelming experience for both parties. Divorces happen nearly everyday across the nation – and Texas is no exception. According to Statista, Texas had 2.6 divorces per 1,000 inhabitants in 2018. With this in mind, it’s important to note that divorces often don’t happen without their fair share of financial challenges. When a divorce and bankruptcy happen at the same time, it can be difficult to decide how to move forward. Understanding how to navigate both a bankruptcy and divorce with certain strategies can help to ensure things move forward as smoothly as possible.

Divorce and Bankruptcy

When a couple makes the decision to end their marriage, the parties typically adjust from both supporting one single household to each supporting two different households with different needs. For many partners, this loss of income from the other spouse can be devastating. When combined with a bankruptcy, it can make the divorce process very difficult; therefore, a divorce and bankruptcy must be handled by experienced legal counsel with a great amount of thought and planning.

There are many reasons why a person may need to file for bankruptcy. The most common causes of financial problems that tend to lead toward bankruptcy include:

  • Unemployment or a reduction in income
  • Divorce
  • Medical bills
  • Death of a spouse
  • Failed business
  • Unwise money management

When it comes to deciding whether or not to put a divorce and bankruptcy into motion, it’s important to understand that it’s unlikely each process will take place simultaneously. Although legal motions can be filed at the same time, in most jurisdictions – including Texas – one case will likely take precedence over the other. If both cases are pending at the same time, the bankruptcy is typically suspended until the court apportions the marital debts and assets to each party.

Filing for Bankruptcy Before Divorce

When deciding to file bankruptcy prior to filing for divorce, it can potentially nullify joint marital debts that would have been divided up during divorce proceedings. While a joint bankruptcy filing requires cooperation between spouses, it can help streamline the divorce process while also reducing the time both parties spend dealing with financial assets.

In Texas, when an individual files for bankruptcy, everything they own as well as anything to which they are entitled becomes part of an estate. If a married couple files for bankruptcy jointly, they can even double the exemption amount for any jointly owned property.

Texas offers the following bankruptcy exemptions:

  • Homestead exemption: Under Texas law, residences on 100 acres or less in rural areas or 10 acres or less in urban areas are exempt from bankruptcy. In the event a house is sold, the proceeds remain exempt for six months after the sale.
  • Personal property exemptions: Up to $100,000 worth of property can be exempted from bankruptcy, including sporting equipment, firearms, family heirlooms, home furnishings, animals, clothing and food, burial plots, health aids, savings accounts, and jewelry, among other such items.
  • Motor vehicle exemption: A bankruptcy filer can exempt the full value of one vehicle per licensed member of their household.
  • Retirement account exemption: The majority of tax-exempt retirement accounts and pensions will be exempt from creditors in bankruptcy.

Filing for Divorce Before Bankruptcy

While Chapter 13 bankruptcy cancels certain debts but requires negotiating with creditors on repayment plans, Chapter 7 cancels qualifying debts altogether. In order to meet the qualifications for Chapter 7 bankruptcy, the filer’s income must fall below the median income for the state. In households where one spouse earns most or all of the income, completing a divorce before filing for bankruptcy can enable both parties to qualify for individual Chapter 7 bankruptcies.

In Texas, to qualify for Chapter 7 bankruptcy, filers must also pass the Texas “means test.” The test compares the median income of the filer to the median income of a household in Texas of the same size. In 2018, the median income for two-person Texas households was over $60,000 and $78,000 for four-person households.

Brazoria County Divorce Attorneys

Filing for divorce can be incredibly stressful, but when combined with the impact of a bankruptcy, these stresses can be overwhelming to navigate simultaneously. When this happens, having the insight of an experienced divorce attorney can help. At Terry & Roberts, our Brazoria County divorce lawyers will work with you to establish your divorce goals and reach the best possible outcome efficiently and effectively. If you are going through a divorce while also considering bankruptcy, contact us today to discuss your needs.

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