Bankruptcy and Divorce

Navigating Divorce and Bankruptcy Arizona 2020Financial stress is often a side effect of divorce. Loss of dual-income, division of already limited assets and the cost of attorney’s fees are often factors that connect bankruptcy and divorce. Many individuals choose to utilize bankruptcy as a tool to overcome financial difficulties before or after a divorce. Navigating bankruptcy before, after, or during a divorce can be overwhelming,  so we’ve compiled some information below that may help you choose which path is best for you.

Types of Bankruptcies

Chapter 7 Bankruptcy typically takes 3-4 months, is reserved for individuals who cannot afford to pay off their consumer debts, and results in a discharge of all personal liability for repaying those debts. You will however be forced to liquidate all “non-exempt” assets, as defined under the bankruptcy code, to pay your creditors in exchange for the discharge of debt. An objective standard Means Test is used to determine whether someone qualifies for Chapter 7 Bankruptcy.

Chapter 13 Bankruptcy basically consolidates your debts and structures a reasonable debt repayment plan for you to continue to pay on your debts in light of current financial difficulties, while under the supervision of the bankruptcy court. Typically, such debt repayment plans under Chapter 13 take 3 to 5 years to complete. A Chapter 13 Bankruptcy may be an option for those who’d like to keep their assets, like homes or vehicles, rather than liquidating them while giving them some reasonable financial breathing room on debt collections.

What To Know About Bankruptcy and Divorce

Debts that can be discharged in Bankruptcy include credit card debts, medical bills, personal loans, leases, judgments, etc. Obligations such as child support, alimony, student loans, taxes, criminal penalties, retirement plan loans, etc. are not eligible for discharge in a bankruptcy matter.

Filing Bankruptcy before a Divorce

If you and your spouse are on amicable terms before the divorce, filing together could save you on bankruptcy attorney’s fees and filing fees, and could potentially protect both of you from paying on joint debts post-divorce. Completing a bankruptcy could also simplify the assets and debts needing division during the divorce. If there are a great deal of assets and debts you’ll need to sift through during a divorce, filing bankruptcy beforehand may be a great option for you. Keep in mind that Chapter 13 Bankruptcies can take up to 5 years to complete, during which time circumstances can change.

Bankruptcy During an Ongoing Divorce

Once a bankruptcy matter is filed, an “automatic stay” is put in place to halt creditors from contacting you throughout the duration of the bankruptcy. The automatic stay lasts until the bankruptcy case is complete, which may prevent debts from being divided in a divorce proceeding. The court-appointed bankruptcy trustee will determine which assets and debts must be included in the bankruptcy estate.

Filing Bankruptcy after a Divorce

With the significant financial changes that occur during divorce, including loss of dual-income, many individuals who previously did not qualify for a Chapter 7 Bankruptcy may do so after their divorce is finalized. Additionally, if you plan to file a Chapter 13, it may be best to file post-divorce given the 3-5 year timeframe of a Chapter 13 case.

It is, however, important to realize that some or all of the community debts allocated to you by the divorce court in your Decree may not be dischargeable in bankruptcy depending on the circumstances, and any debts or obligations related to child support or spousal maintenance will not be dischargeable in bankruptcy.

The best way to determine how to pursue bankruptcy adjacent to divorce is to consult an attorney. To learn more about how bankruptcy may affect your divorce, contact the attorneys at OWENS & PERKINS by clicking here or by calling our office at 480.994.8824 to schedule your FREE 30-minute legal consultation. We remain fully operational while practicing appropriate social distancing and cleaning regimes.