In New York and throughout the U.S., divorce and bankruptcy often go hand in hand. For many people, going through a divorce is one of the most financially and emotionally devastating experiences. Sometimes, a couple’s financial difficulties are the main cause of their divorce, and in other cases, the divorce itself becomes so costly that bankruptcy becomes necessary. Many people wonder when, and if, they should file for bankruptcy. Like many other legal matters, the answer is “it depends.”
Why are Divorce and Bankruptcy Often Linked?
People often think that when a person going through a divorce seeks bankruptcy, the bankruptcy itself caused the divorce. That may be the case sometimes, but generally, a couple does not seek divorce because they need to file for bankruptcy. Usually, it is the other way around.
Divorce can be so financially devastating that one or both of the ex-spouses need to file for bankruptcy. Bankruptcy may become necessary to deal with mortgage payments on a home that is not affordable now that the spouses are not sharing the burden of paying the mortgage. The house may be underwater, and bankruptcy could be the only viable option after the divorce is finalized.
Can One Spouse File for Bankruptcy Separately?
What happens when one spouse needs to file for bankruptcy before the divorce is finalized? This is a question clients frequently ask us at the Law Offices of Jason Lutzky. The answer is, yes, one of the divorcing spouses can file for bankruptcy apart from the other spouse. The couple does not necessarily need to file for bankruptcy before the divorce is finalized.
Keep in mind that filing for bankruptcy before your divorce is complete is not always the best option. The best legal option for you depends on your situation, and you should discuss the matter with an experienced New York City bankruptcy or divorce lawyer as soon as possible.
Which Spouse Should File for Bankruptcy First?
While it is usually not a good idea to file for bankruptcy and divorce at the same time, you have the option to file for bankruptcy while at the same time filing for a divorce. Ultimately, the decision is up to you. We recommend considering whether you and your spouse are on friendly terms. If you are, it could be in your best interest to file for bankruptcy first. One of the benefits of filing together as a married couple is that you can share the filing fees, and the costs of legal representation for your bankruptcy.
Filing jointly before your divorce could allow you to both benefit from protection by the bankruptcy court, and you could both benefit from the discharge of some of your debts that happen at the end of the bankruptcy process. If you and your soon-to-be ex-spouse both own property together, you could benefit from filing before you get divorced. For example, you could take advantage of certain home exemptions when you own your home with your spouse.
Also, if you file for bankruptcy first, the division of assets that needs to happen during the divorce process could become simplified. Typically, assets are divided during the bankruptcy process, but this depends on the type of bankruptcy you file, and it can sometimes change.
You should also consider whether your joint income puts you above the threshold for filing for bankruptcy. For example, if you file for Chapter 7 bankruptcy, you and your spouse’s joint income could put you over the income threshold for filing for bankruptcy. However, if your joint income falls below the threshold, you will have more options when it comes to filing for bankruptcy.
Chapter 7 Bankruptcy is Often the Best Option for Couples Filing for Divorce
Everyone’s situation is different, and only an experienced lawyer can effectively guide you through which type of bankruptcy works for you. For example, if you own significant assets, or you own a family business, you may need to file for Chapter 13 bankruptcy. In many cases, however, Chapter 7 is the best type of bankruptcy for those who are going through a divorce or considering a divorce.
At the end of a Chapter 7 bankruptcy, the bankruptcy court typically eliminates all dischargeable debt between three to six months. The relatively quick turnaround time with a Chapter 7 bankruptcy allows people to complete the bankruptcy process and file a divorce sooner. If you qualify for a Chapter 7 bankruptcy, you may want to consider filing before your divorce at least and speak to a lawyer about the possible benefit of doing so.
If you do not meet the eligibility requirements for filing for Chapter 7 bankruptcy, you may need to file for Chapter 13 bankruptcy. The downside of filing for Chapter 13 bankruptcy is that you will need to set up a three-to-five-year debt payment plan. The court will not eliminate your debt at the end. Instead, you will need to go through a long process that could drag your separation or divorce out longer than is necessary.
Not All Debts are Discharged After a Bankruptcy
If you are considering filing for Chapter 7 bankruptcy before your divorce is finalized, keep in mind that not all debts will be discharged or eliminated. Bankruptcy courts will not forgive nondischargeable debts, and you and your spouse will still be on the hook for certain types of debts.
The most common debts that cannot be discharged are child support, alimony, fines owed to the government, court fines, student loans, and attorney fees. Also, if you owe back taxes, courts will not discharge those debts. Other debts may be barred from discharge, depending on the circumstances of your case.
Contact the Experienced Divorce Lawyers at Law Offices of Jayson Lutzky
Every divorce is unique, and every couple’s financial situation is unique. If you are unsure about whether or not you should file for divorce, we can help. Contact our Bronx divorce law firm as soon as possible to schedule your free consultation.