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Perils of Filing for Bankruptcy While Divorcing

Divorce and bankruptcy sometimes go hand in hand. Marital problems are often caused at least in part by financial stressors. Many couples experiencing marital problems also bear a heavy debt load and are considering filing for bankruptcy relief, either before or after the divorce proceedings.

The timing of the two legal matters — and whether one or both spouses should be involved in the bankruptcy — may impact how marital assets can be effectively preserved for the spouses’ mutual benefit. These are three possible scenarios and the pros and cons of each:

  1. Proceeding with divorce and bankruptcy simultaneously — When one or both spouses file for bankruptcy, an automatic stay goes into effect, preventing creditors from going after the debtors’ joint and individual property. If a divorce is pending when the bankruptcy petition is filed, the division of the couple’s marital assets and debts must be put on hold. That means the divorce may take far longer, since there is no way to ascertain the couple’s eventual property holdings until the bankruptcy discharge is final.
  2. Filing for bankruptcy jointly before divorcing — There are advantages to taking on the bankruptcy case before filing for divorce. First, the couple may share an attorney and pay only one filing fee. Second, the bankruptcy may wipe out some or all marital debt before the divorce begins, which means that the process of division of marital assets and debts in the divorce will be simpler. This works particularly well with a Chapter 7 bankruptcy, which usually can be completed in less than six months. Third, using the available bankruptcy exemptions, the spouses may be able to keep a larger portion of their assets as a married couple than they would if they were to divorce first and then file for bankruptcy individually.
  3. Completing a divorce before filing for bankruptcy — In some cases, the spouses will qualify for more favorable bankruptcy treatment if they divorce first. In the case of a Chapter 7, a debtor must pass the means test, which generally requires proving that his or her income falls below the median level in New Jersey. A married couple may have joint income that is too great to pass the means test. As divorcees, they each may qualify.

Another factor to consider is that divorce and bankruptcy are notoriously stressful situations. If the marital relationship is very contentious, it might be difficult for the spouses to cooperate to the extent necessary to complete a joint bankruptcy. It may be best for them to get divorced and then decide whether to file for bankruptcy separately. An experienced New Jersey divorce attorney will be able to analyze your situation and advise you how the two proceedings should be timed.

At the Law Offices of Kisha M. Hebbon, LLC, we represent divorcing spouses throughout New Jersey, including those with severe financial problems. Call 732-633-2224 or contact us online to schedule an appointment at our office in Somerset.


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