The Intersection of Divorce and Bankruptcy

Bankruptcy and Divorce

How Bankruptcy and Divorce Work Together in Texas

One of the leading causes of divorce in Texas is when married couples argue over money. Any marital issues can become far worse when a married couple is experiencing financial difficulties. Divorce does not make financial problems go away. In fact, creating two households where one existed before can compound the financial stress. There are some cases where the couple may need to go through bankruptcy around the same time they are getting divorced. There are legal and practical considerations that come into play when married couples explore the intersection of bankruptcy and divorce.

You Would End Up with Debt from the Marriage Under Texas Law

One important thing to remember is that Texas is a community property state. What this means is that both the couple’s assets and debts will be split down the middle in the divorce. If the married couple ran up a large amount of debt during their time together, each spouse would need to pay back their share after the divorce. The only way that one spouse will not need to pay back debt is when the other spouse had it before the marriage (for example, student loan debt they are still carrying).

Bankruptcy Can Give You a Fresh Start

Bankruptcy may be a way to clear the debt that may otherwise be assigned to you after the divorce. When you are starting again in your personal life, it may also improve your situation to get a fresh start financially. The question is whether to file for bankruptcy before, during, or after the divorce. Bankruptcy will certainly complicate the divorce proceedings, but that should not automatically rule out your consideration of it.

First, you must qualify for the type of bankruptcy that would result in a fresh start. Otherwise, you would still have the debt, albeit with more time to pay.

Two Types of Bankruptcy to Consider

There are two types of bankruptcy to consider. The first, Chapter 7 bankruptcy, is a liquidation where the debtor gets a full fresh start with their debts erased (although not all debts qualify for Chapter 7 forgiveness). However, this type of bankruptcy comes at a cost, as non-exempt assets are sold and the proceeds are turned over to creditors. Not every debtor can qualify for Chapter 7 bankruptcy. There is a means test that only permits those below a certain income level to use Chapter 7 bankruptcy.

The second type of bankruptcy to consider is Chapter 13 bankruptcy, which is also known as restructuring. The debtor still needs to pay back their debts, but they may get an extended period of time and different payment terms. This is the only type of bankruptcy that a debtor with a higher income level can use if they cannot pass the means test.

The Timing of Divorce and Bankruptcy Is Complex

How your bankruptcy and divorce proceedings unfold depends on which you file first. If you have filed for bankruptcy before divorce, the bankruptcy must be addressed first. The divorce issues would need to wait to be handled until after the bankruptcy is finalized. The reason why is that the marital estate cannot be divided until it is known exactly what the marital estate is comprised of.

The Pros and Cons of Filing for Bankruptcy Before a Divorce

There are benefits to filing for bankruptcy before filing for divorce. The debts that were incurred during the marriage may go away depending on the type of bankruptcy that is filed. However, the two spouses need to be on relatively good terms in order to delay the divorce proceedings until after the bankruptcy case is resolved. The situation may be different in a Chapter 13 filing where the debts remain but the debtor has additional time to pay.

One reason to wait until after bankruptcy is final to begin divorce proceedings is that it could maximize the property that you are able to retain under a Chapter 7 filing. There are certain exemptions that apply to property, such as your home and your car. In many categories, married couples are entitled to double the exemption that single debtors have. Therefore, filing for bankruptcy when you are still married can give you a higher amount of debt relief.

On the flip side, it may be easier to qualify for Chapter 7 bankruptcy under the means test when there is only one earner. The ceiling on the amount of income that you can earn and still be able to take advantage of Chapter 7 does not double when there are two earners. If you earned less than your spouse, there may be a greater chance that you can qualify for Chapter 7 if you did not before the divorce.

If you are filing for bankruptcy on your own after separating from your spouse, be prepared to answer extensive questions from the bankruptcy trustee about your situation. They will want enough information to assure them that you are not living apart from your spouse simply to defeat the application of the means test.

You Can File for Bankruptcy Jointly During the Divorce

Bankruptcy law does not prohibit you and your spouse from filing jointly when you are separated. You are allowed to file for bankruptcy together, but you are not obligated to do so. If you do file jointly, be prepared to have to reveal certain information about assets, debts, and income that your spouse may not already know. There will also be a special form that details the expenses in each household.

The Automatic Stay Can Be Beneficial, but Makes Divorce More Complicated

No matter what type of bankruptcy you choose, there is an automatic stay that goes into effect as soon as your petition is filed. Creditors cannot take any action to collect their debts so long as the automatic stay is in place. The automatic stay gives you breathing room, but it could also make the divorce process more complex.

In addition, you are not allowed to transfer any assets both right before and during the bankruptcy. The reason is that your assets may be used to pay creditors. Courts may disallow asset transfers that are made during bankruptcy. Fraudulent asset transfers may even keep you from successfully going through the bankruptcy process—and could open you up to legal liability for making those transfers. However, when you are getting divorced, you are also dividing the marital estate, which by definition could involve a transfer of property.

You May Need Permission from the Bankruptcy Court to Finalize a Divorce

The automatic stay may also impact whether you can get divorced. If you are also in the middle of bankruptcy, you would need to petition the court for an order to deal with the financial issues arising out of your divorce. The court may allow the divorce to proceed so long as it does not impact the creditors. If your creditors would be harmed by the divorce, you may not be able to take any action to divide the community estate.

It is important to know that certain obligations remain unchanged regardless of whether you are declaring bankruptcy. Child support is not affected by the fact that you are in financial distress. The court may consider your financial situation in determining the amount of the monthly payments, but it is more likely to reflexively apply the set formula for child support used in Texas. Post-divorce, if you fall behind on child support payments, you may need to consider a Chapter 13 restructuring to keep you out of trouble with the law for delinquent child support payments.

It Helps to Divorce Amicably When There Are Financial Issues

How you handle bankruptcy and divorce depends both on your financial situation and your relationship with your soon-to-be ex-spouse. If you have a precarious financial situation, it may be more advantageous for you to try to end the marriage as amicably as possible so you can work together to obtain the best possible result for both you and your spouse. Hiring an experienced family law attorney can facilitate a divorce process that could help both of you improve your financial situation. Unfortunately, when financial issues are at the root of a divorce, an amicable process is not always possible.

Consult a Divorce Attorney to Learn More About Your Options

You should consult with a divorce attorney to learn more about your options and which, if any, may work best for you. A family law attorney could also consult with a bankruptcy attorney to gain more helpful information to apply to your situation. There is no one ready answer for your situation. Everything depends on your circumstances, including both the relationship with your soon-to-be ex-spouse and your finances.

Contact an Angleton Family Law Attorney Today

The family law attorneys at Terry & Roberts can work with you when you are dealing with special situations in your divorce. We recognize that the most effective divorce solutions do not always come as the result of litigation and battles. It is essential that you contact a lawyer early in your divorce process to obtain the most effective legal advice. To schedule an appointment to speak to one of our attorneys, please contact us today.

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