Timing is Everything When Divorce and Bankruptcy are Concerned

By Donald A. Hayes, Attorney at Law


 

The question is often asked, should I file my bankruptcy before I get divorced or should I get divorced before I file bankruptcy. Frequently people find themselves contemplating filing bankruptcy while they are at the same time embroiled in divorce litigation. This is caused because of the financial drain that goes with maintaining two separate households, while at the same time having much less income than was previously available before the marital break up. Also, there are lawyers bills for each side as well as child and/or spousal support to be paid, not to mention the pile of credit card and other debt which was accumulated during the marriage.

The answer to the question depends upon several factors. Take for example a situation where the parties own a residence with $50,000 equity and a rental property with $50,000 equity. Their goal was for Wife to take the residence and for Husband to take the rental property. In this example if Wife files bankruptcy before the divorce Judgment is entered then she must list both properties in her bankruptcy schedules because she must list all community property which both spouses have an interest in. But unfortunately she can only exempt the residence and not the equity in the rental property. So the Bankruptcy Trustee will liquidate and sell the rental property and it will have been lost. Now this loss could have been avoided if the parties had properly planned the sequence of events. If they would have gotten their divorce Judgment first, then filed bankruptcy, then the rental property would not have to be listed as community property in her subsequent bankruptcy. The rental property which was awarded to Husband in the divorce Judgment is no longer community property and not part of Wife=s bankruptcy estate. The trustee would have no rights to the rental property.

Another example of where timing makes a big difference is where the parties have a fair amount of assets and liabilities. Generally speaking, the divorce court will divide the assets and liabilities equally. The parties counsel will attempt to negotiate for their respective client approximately one-half of all the assets and liabilities. So after their divorce one of the parties files Chapter 7 and discharges their half of the liabilities and retains their half of the assets. If on the other hand that same party filed Chapter 7 during or before the divorce proceeding, then that party would not be liable for any of the liabilities as a result of the bankruptcy discharge. The divorce court would not be obliged, in fact it would be prohibited from, awarding the liabilities to the discharged party. So the other party would argue that since they have taken all of the community liabilities, that they deserve to be awarded an equal amount of community assets. That is, they want more of the assets in order to accomplish an equal division mandated by the Family Code and the Court is likely to concur. So the party who filed their bankruptcy prematurely will suffer a loss of an equal amount of the assets which would have been awarded to them had they waited to file bankruptcy after the division of assets and liabilities took place.
In some cases it makes more sense to file a joint bankruptcy petition while the parties are still married to each other in cases where there is no jeopardy of losing any property. A joint filing will cost them only one fee,while two separate filings will cost them two separate fees.. Separated parties may file jointly before the divorce Judgment is entered. Like in all matters legal, seek the advice of a competent bankruptcy specialist before proceeding. A lawyer who practices divorce law only may not know much about bankruptcy law and therefore good opportunities may be lost.