Should I File for Bankruptcy Before or After a Divorce?

What are the top three reasons Americans list for filing for bankruptcy? I bet you can guess the first two. The top reason is unforeseen medical debt, while the second most common reason is the loss of a job. But the third reason—divorce—is somewhat counterintuitive. But bankruptcy after divorce is quite common and, in fact, divorce drives thousands of Americans into bankruptcy each year.

Why File for Bankruptcy After Divorce?
Much will depend on the distribution of marital assets and debts during your divorce. One or both spouses may be saddled with debts they cannot afford and financial stressors are often the cause of divorce in the U.S. Worse still, one or both spouses may need the money they do have to get themselves situated in their new lives. And then the process of divorce itself is a major expense as well.

Commonly, expenses that were once split down the middle will be absorbed by one party alone. Changes such as these are sure to impact the amount of disposable income you have. Many Americans find themselves in a debt spiral and have no way of meeting the expenses they are now obligated to pay. If your ex ran up credit cards in your name, you may be better off discharging those debts in bankruptcy than allowing them to accrue interest while you pay them off.

What Happens When You File for Bankruptcy
Typically, those who are saddled with more debt than they can afford are facing lawsuits from debt collectors and creditors to recover the money that they owe. Once a creditor files a lawsuit and wins a judgment against a debtor, they can begin taking aggressive measures to collect the debt. These include garnishing your wages, levying your bank account, or placing a lien on your real estate (including your homestead property).

When you file for bankruptcy, the creditor must cease all efforts to recover the debt until your bankruptcy case has been processed.

Two Types of Bankruptcy
There are two types of bankruptcy that are commonly available to individuals. Those are Chapter 7 and Chapter 13 bankruptcy.

Chapter 7 bankruptcy allows you to discharge all of your unsecured debts. The trade-off is that some of your assets may be liquidated if you are unable to protect them using state or federal exemptions. The bankruptcy will stay on your credit report for ten years and you will not be able to file another Chapter 7 bankruptcy for seven years.

Chapter 13 bankruptcy allows you to consolidate all of your debts (including secured debts) into a repayment plan. Debts are organized according to a hierarchy, with taxes, child support, and alimony considered the “highest priority.” Next comes secured debts and after that, unsecured debts. You may not be required to repay all of your unsecured debts, depending on your income and how much you can afford to pay. Chapter 13 bankruptcies will stay on your credit report for seven years, and you may be able to file another bankruptcy sooner. Your credit score is likely to take less of a hit as well.

Filing a Joint Bankruptcy
Divorcing couples often file for bankruptcy together since the debts are likely to be shared and part of the marital estate. They file what is known as a “joint petition” for bankruptcy and all of the financial information of both spouses is contained in the bankruptcy filing. Generally speaking, it is more efficient and cost-effective to file together than it would be to file separately.

The bankruptcy can wipe out debts accrued during the marriage making it easier for the couple to tackle other issues related to their divorce. This will also save them money on legal fees related to their divorce case. In many cases, couples will squabble over who should owe what debt and the whole thing gets tied up in litigation where a judge must render a final decision. Discharging the debts prior to divorce makes a lot of sense in that situation.

In other cases, for instance, if one spouse is facing a lawsuit, it will make more sense for them to file immediately as opposed to waiting until the debt collector gains a judgment against them.

Talk to a North Carolina Bankruptcy Attorney Today
If you’re worried about how divorce is going to impact your financial situation or are already in a difficult position, talk to the North Carolina bankruptcy attorneys at Jack G. Lezman, PLLC about your options for filing before your divorce or after and which option makes the most sense for you.

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