For couples facing both financial strain and marital problems, the question of whether to file for bankruptcy before divorcing – or separately in the wake of a finalized settlement – can be very important.
In some cases, filing jointly for bankruptcy before ending one’s marriage may simplify certain financial issues. In other situations, it may create additional complications. The right approach for any particular set of divorcing spouses depends heavily on the couple’s debt levels, assets, communication and long-term goals.
It can make negotiations easier
One potential advantage of filing for bankruptcy before divorce is efficiency. Married couples may qualify to file a joint bankruptcy petition, which can reduce court costs, legal fees and administrative expenses compared to filing separately later. Joint bankruptcy may also eliminate or restructure shared debts before property division occurs during the divorce process.
Addressing debt first can sometimes make divorce negotiations easier. Credit card balances, medical bills, personal loans and other unsecured debts often create major conflict during divorce proceedings. If those debts are discharged beforehand, spouses may have fewer financial disputes to resolve.
Bankruptcy may also help preserve certain marital assets. If overwhelming debt threatens a family home, vehicles or savings, bankruptcy protections may provide temporary relief from collection actions or foreclosure efforts while the couple reorganizes financially.
The delay can be difficult and emotional
With all of this said, filing for bankruptcy before divorce is not always the best option. Bankruptcy requires extensive financial disclosure and cooperation between spouses. If the relationship is highly contentious or one spouse is hiding assets, joint filing may become difficult or risky. Also, property settlement obligations may also receive different treatment depending on the bankruptcy chapter involved.
In some situations, divorcing first may provide greater flexibility, but in others, it may simply bind spouses together financially for longer. This may be especially true if a couple only qualifies to file for relief under Chapter 13 of the Bankruptcy Code.
Because bankruptcy and divorce laws intersect in complex ways, seeking legal guidance is extremely important before making decisions. The stakes are simply too high for a DIY approach.