It’s no secret that a lot of marriages break down because of financial problems. We’ve all heard the sad stories – a spouse has a spending problem and blows all of the couple’s money. A spouse has a gambling problem and they gamble away the couple’s retirement savings. One spouse loses their reputation and in short order, a successful career. Or, unemployment afflicts the marriage and the angered spouse becomes bitter and resentful about their spouse’s lack of income.
What about you, has your marriage been on the rocks because of financial problems? If so, you may be leaning towards bankruptcy, but you’re not sure if you should file before or after the divorce. Now you’re wondering, “Does the timing make a difference?” Right about now, you may be thinking that you’d prefer to see a divorce attorney first. After all, you argue with your spouse all the time about money and you’re very tempted to walk out the door, or have your spouse pack their bags.
We’ll give it to you straight: If you run out and file for divorce first, it’s not going to automatically relieve the financial pressure. In many cases, if a couple files for divorce before the bankruptcy, they are worse off and so are their children. Often, it makes financial sense for the couple to file bankruptcy first. Below, are some important reasons why it may be better for you to eliminate debt through bankruptcy before you file your divorce papers.
1. Filing jointly is more affordable.
When a married couple files bankruptcy jointly, it’s more affordable than filing bankruptcy separately. This translates to one filing fee, only one set of court documents, and usually you only pay one attorney fee. In other words, by filing jointly, you can cut the costs by half. Many bankruptcy attorneys charge the same for a joint case as an individual case; however, there are some who charge an extra fee if there’s more work involved. Since most bankruptcy lawyers offer free case evaluations, you can compare the attorney fees and select a lawyer who resonates with you.
2. Bankruptcy can discharge joint debts.
Suppose you file Chapter 7 bankruptcy. In that case, you will be able to discharge all qualifying joint debts, such as credit card debt, personal loans, medical bills, utility bills, and past-due cellphone bills. If you have thousands in joint credit card debt, this can eliminate quite a financial burden before you file for divorce.
If you file bankruptcy after the divorce, it may not serve you well. When you have a lot of debt, you’ll likely be forced to take responsibility for some of the joint debt you and your spouse acquired during the marriage. In other words, if you agree to pay a certain joint debt, you’re agreeing to cover your spouse’s portion of a specific debt. If you file bankruptcy after the divorce and the debt is discharged, you are not discharging your promise to cover your spouse’s share of the debt.
Let’s say you agree to pay a $10,000 joint credit card. You agree to pay off the card in your divorce settlement. It’s important to note that a divorce settlement is merely an agreement between you and your former spouse. The settlement does not erase your spouse’s liability to pay on any joint accounts. You can “agree” to pay on the $10,000 credit card, but if you fail to pay it off, the creditor can go after your ex, who is not off the hook.
In the settlement, you agreed to pay the credit card off instead of your spouse. If you file bankruptcy after the divorce, you’ll be discharging your liability to pay on the credit card account. However, you’re not discharging your former spouse’s liability to pay the debt. If your former spouse is forced to pay the card, you’ll have to reimburse him or her, or you could be forced to pay the credit card debt.
In contrast, if you file bankruptcy before divorce, the debt will be literally wiped out and you cannot be forced to pay it in the divorce settlement. As an added bonus, if you file jointly with your spouse, he or she will also be relived of all qualifying, joint debts.
3. Beware of your spouse filing individually.
Sometimes, only one spouse files bankruptcy before, during or after a divorce case. If your husband or wife were to file bankruptcy before or during the divorce and you decide not to file jointly because you’re afraid of the bankruptcy stigma, guess what? You’ll probably be liable for all of the joint debt.
Why? Because, if your spouse files bankruptcy to eliminate their liability on all joint and other dischargeable debts, he or she cannot be forced to pay any joint debts through the property settlement. In the end, you end up being liable for 100% of the joint debt.
4. Filing jointly makes the settlement process easier.
When a couple files bankruptcy before the divorce, it makes the property settlement process less complicated because there is less debt (sometimes a lot less) to divide among the spouses. Not only that, but people don’t have to keep track of joint debts that their spouses agree to pay out of fear of their credit being damaged. This alone saves a lot of worry, credit tracking and time!
We hope this financial advice is of use to you. To learn more about filing for divorce in Los Angeles, contact Claery & Hammond, LLP for a free case evaluation.