Bankruptcy Pre-Divorce Can Benefit Couples In Debt

debt-definition-300x199 This post is part one in a two-part series by Brooke McDonald on how even a divorcing couple, or a couple who has divorced, may find bankruptcy a helpful tool in setting up fresh, new lives.

Divorce is never easy. The process of untangling two lives requires slicing through and divvying up all shared assets. Divorce negotiations can be exhausting, emotion-filled times. Adding stressful financial matters to the mix can further complicate the process. Divorce during times of financial success is concerned with dividing assets. But during hard economic periods, it may be more common to be assigning debts or assets with negative equity, such as property. If a couple has unpaid debt, this often raises the stress level of pre-divorce negotiations. Conflict over unpaid debts preceding divorce negotiation can lend an impending atmosphere of instability, fear, and suspicion to the divorce negotiation environment.

Couples are often driven to the edge of bankruptcy and back even before divorcing. If a couple’s economic situation is looking grim and the relationship has soured enough to pursue divorce with finality, the idea of declaring bankruptcy together may sound unwelcome. However, a joint bankruptcy can actually prove a wise decision for couples who are still capable of cooperating in order to find better financial resolution.

Pre-divorce bankruptcy can make the divorce process smoother and financially kinder to the parting individuals. When pursued before divorce, joint bankruptcy makes splitting assets and debts easier. This is because much debt can usually be discharged, and, because in many states, many assets are exempt from being liquidated in a bankruptcy. Thus, the couple is left with more free and clear assets available for the division, and less debt.  This can lessen stress on both during the divorce and after.  It also typically costs both soon-to-be ex-spouses less overall than if they both filed bankruptcy separately after divorce. Nolo points out that because bankruptcy filing fees are equal for either a joint or individual filing, a couple filing jointly saves money on court and attorney fees alike.

Additionally, as a Chapter 7 bankruptcy case typically involves legal fees between $1,000 and $2,000 and court filing fees of about $300, a divorcing couple will be saving themselves money, as battling over the debts through litigation would undoubtedly be more expensive.

The case for bankruptcy before divorce

Declaring bankruptcy before divorce is beneficial because a divorcing couple may be able to discharge a great deal of debt, credit card and other consumer-related debt. Discharged debt is debt that does not need to be paid any longer. Legally, a debtor is off the hook – and a person doesn’t have to worry about nagging creditors because creditors are prohibited from contacted a person protected by bankruptcy.

Debts that cannot be discharged, like federal student loans, specific condominium or housing cooperative fees, tax debts, and fines and penalties owed to the government (such as fines for a DUI violation), will remain the joint responsibility of the divorcing couple. Divorce negotiations can sort out who is responsible for which remaining debts.

The goal with a pre-divorce bankruptcy is to have less of this debt remaining so that one spouse is not left liable for debts they cannot pay back and which the other spouse is supposed to be paying. A divorcing husband and wife can divide their debts and assets in a way that is legally binding to each of them individually per the divorce agreement. But to their creditors, the couple as a pair is still considered indebted and responsible. So if the husband does not pay off his part of the debt post-divorce, creditors can still come after the wife. If the wife ends up paying the debt, this violates the divorce decree and she is entitled to reimbursement.  Here things could potentially become frustrating and costly if the wife has to chase the husband to pay this debt or even take him to court.

This is why declaring bankruptcy and discharging debt before a divorce occurs can be a wise option for couples, dissolving debts and clearing the way for a fresh start in the future. When a couple can still communicate and work together through the bankruptcy filing, their post-divorce lives have the potential to be less concerned with financial burdens and less conflict-inducing for the two of them.

Source: Cornell, Mark P. and Kelly Ovitt Puc.” Debts, Divorce, and Bankruptcy.” New Hampshire Bar Journal (Fall 2009). Retrieved from: http://www.nhbar.org/uploads/pdf/BJ-Fall2009-Vol50-No2-Pg22.pdf

Brooke McDonald is an avid writer and online contributor for Minneapolis MN bankruptcy attorney Chad A. Kelsch at Fuller, Seaver, Swanson & Kelsch, P.A. She enjoys covering legal issues and has worked as a reporter for a legal publication.