How Bankruptcy Impacts Divorce

Divorce and bankruptcy are two legal areas that can have a tremendous impact on your future, as well as some overlap. Although every divorce case is different, finances are a major element that must be addressed, especially when there is debt and liabilities involved. Our New Jersey family law attorneys have worked with many clients dealing with bankruptcy and divorce, and we have the experience to help clients navigate the added challenges toward a brighter future.

If you are considering divorce and have financial concerns for which bankruptcy may be an option, timing will be the most important factor to consider. Spouses will also need to consider whether they should file bankruptcy jointly or individually. Based on your unique circumstances, you may consider filing bankruptcy first, or filing divorce before addressing bankruptcy.

• Filing bankruptcy first – Filing bankruptcy jointly before filing for divorce can allow spouses to address all debts in one case and eliminate or substantially reduce debt loads. It may also help spouses qualify for Chapter 7 bankruptcy and discharge most or all unsecured debt through a process that only takes a few months. If spouses file Chapter 13 jointly, both parties will be responsible for making payments toward their debt until the conclusion of the payment plan, after which remaining unsecured debt will be discharged. If one or both spouses file bankruptcy before or during divorce, family courts will not divide property or debt until permitted by the bankruptcy court.
• Filing divorce first – Filing divorce before bankruptcy may be an option for spouses who do not qualify for Chapter 7 bankruptcy using their joint income. By filing separately, one spouse or even both spouses may be able to qualify for Chapter 7 without having to make monthly payments toward debt under a Chapter 13 plan. Filing divorce first also provides a clear judgment on division of assets, which may help shield a spouse from certain liabilities that now belong solely to the other – such as when one spouse takes a house during divorce. However, spouses may still be liable to creditors even if one party was ordered in the divorce to pay a certain debt. Judgments handed down by the family court regarding alimony or child support payments can also help during a later bankruptcy, as it will be clear how much one party has to pay in support or how much income they will receive. Keep in mind that support payments are non-dischargeable, and will not be stopped during the automatic stay that comes with bankruptcy.

There is a lot to consider when pursuing a divorce and bankruptcy, and the path you take will ultimately depend on your unique situation. Our lawyers can help you better understand your rights and options during this time, and can assist you in making an informed decision about when and how you should file.