People that are struggling with debt know that financial problems affect more than their pocketbooks; their most intimate relationships can be affected as well. As a result, many who are in a situation to file bankruptcy may also be considering divorce. A common question for those in this situation is whether it is better to file for bankruptcy or divorce first. To arrive at the answer requires consideration of many factors.
Chapter 7 or Chapter 13?
Whether to file for divorce or bankruptcy first can depend on the type of bankruptcy that the couple wishes to file. Most couples considering bankruptcy have a choice between filing for Chapter 7 and Chapter 13 bankruptcy. Since the Chapter 7 process can be completed in as few as three months, couples filing this type of bankruptcy can easily complete it before filing divorce.
Unfortunately, not all couples can qualify for Chapter 7 bankruptcy, as it requires them to pass a means test. If the couple's disposable income is too high, the court may require them to file Chapter 13 instead. Although this type of bankruptcy offers many advantages, it is generally better to file it after the divorce has been completed, as it takes between three to five years to complete.
Couples that are unable to qualify for, but wish to file for Chapter 7, are also well advised to wait until after the divorce has been completed, as it would allow them to file bankruptcy as individuals, which can make it significantly easier to pass the means test.
Division of property
One of the benefits of filing bankruptcy before divorce is that it can simplify the property division process by wiping out the couple's debts. Since a good deal of time is spent determining the responsibility of each party for the marital debts, filing bankruptcy first can significantly speed up this process and make the divorce less contentious.
Under Alabama law, for those with significant property, it is especially advantageous to file bankruptcy before the divorce, especially if the couple is considering Chapter 7. During this type of bankruptcy, any unencumbered property that is not exempt by law may be sold to satisfy the couple's debt. Under Alabama law, married filers that file jointly may claim more of their property as exempt, which allows them to better protect it from creditors.
Another benefit of filing bankruptcy before divorce is that it allows couples to save on bankruptcy costs, as joint filers only have to pay one filing fee and can be represented by one attorney. However, this approach is not advisable if the couple disagrees on certain issues during the bankruptcy. Since the resolution of these issues can later affect each party differently during the divorce, it can create a conflict of interest, requiring both spouses to be represented by separate attorneys in many cases.
To avoid future complications, couples considering bankruptcy as well as divorce should consult with an experienced bankruptcy attorney. As each couple's situation is unique, an attorney can advise the best course of action that would minimize or avoid negative repercussions.