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Divorce and Bankruptcy: What You Need to Know

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Going through a divorce is already a substantial amount of stress. Should you consider adding even more stress and worry on top of the situation by also filing for bankruptcy? If you feel you should go through bankruptcy, is it better to file before or after finalizing the divorce? There’s not an easy answer to this question, as it will depend on a range of factors.

Before you make a decision, it’s a good idea to have a better understanding of what you can expect when it comes to bankruptcy. This means learning a bit more and taking the time to speak with an attorney who is well-versed in bankruptcy law, and who knows how divorce could affect the case.

The Effects of Bankruptcy on Married and Divorcing Couples

In Arizona, it is possible for only one spouse to file for bankruptcy. The other spouse doesn’t have to file unless they have joint debts. This is commonly the face. If your spouse files for bankruptcy to pay for their separate debt, there shouldn’t be a worry about it affecting your credit score.

Other times, there could be direct or indirect effects on your finances and credit score when one spouse files. Depending on the situation, it may be better for the spouses to file for joint bankruptcy. Again, talking with a bankruptcy attorney about the effects of filing for bankruptcy while married vs. after divorce is important.

A lot of times, couples who are facing bankruptcy and divorce will opt to handle the bankruptcy first. It can be a good way to provide some added protection to certain assets, so they can be split later. This way, they can deal with the joint debt they hold before they finalize the divorce. It tends to be a good option for those who are going to be filing for bankruptcy under Chapter 7 of the bankruptcy code. This won’t have a repayment plan.

Chapter 13, on the other hand, will require a debt repayment plan. Those who are recently divorced could find it hard to keep up with one of these debt payment plans since they will likely have a smaller household income than before they were divorced.

What About Property Division?

When you are filing for bankruptcy and divorcing, there will be cases where certain types of assets, known as non-exempt assets, will be frozen. This means that the property that has been frozen cannot yet be divorced between the spouses. Only exempt property will be eligible for division at that time. You would therefore have to wait to see what happens with those non-exempt assets before they could be divorced.

You also need to keep in mind that Arizona is a community property state. This means that all assets, as well as debts that were accumulated during the marriage, become joint debt… even after the divorce is finalized. The debt will be split between the spouses. If one of the spouses filed for bankruptcy after the divorce, the creditors could still go after the other spouse who has not filed for bankruptcy. Therefore, both parties should file for bankruptcy after the divorce if there is a lot of debt and they have not yet filed.

Otherwise, it could become a problem. Creditors could start calling you and requesting that you now pay the full debt that you and your spouse both owed. Since your spouse filed bankruptcy, though, it will mean that you are on the hook for the debt until you file. Even if they have not started to contact you yet, it’s better to take the preemptive strike and file.

Something to keep in mind is that bankruptcy will not clear certain types of debts. For example, child support and spousal maintenance will still need to be paid in full. These debts and responsibilities can’t be wiped away.

Is Filing Just More Stress?

You already have a lot of stress in your life from the divorce. Do you really want to compound that stress by going through bankruptcy? Whether it’s before, during, or after the divorce, it’s true that yet another legal situation can bring more stress, you’ll find that it tends to be worth it. Yes, things feel bad right now because of the divorce and the mounting debt. However, handling it as soon as possible will make things easier for you going forward. A little stress now may well be worth it, so you can have a brighter and easier life in a few months.

Just make sure you take the time to learn as much as possible about what will be expected of you. Filing on your own might be possible, but it truly is much easier when you have a bankruptcy attorney helping you make decisions on how to proceed.

When Should You File?

Most of the time, it’s a bad idea to file for bankruptcy in the middle of a divorce if it can be helped. There are a lot of variables to consider, and they are different from case to case that will determine the best time to file and the best way to file. Typically, it should be done before or after the divorce, as it tends to make things easier on you.

Take the time to speak with an attorney about not just your divorce, but also bankruptcy if you feel that it’s a path you might need to take. Your divorce lawyer may know bankruptcy lawyers and provide you with a referral. Additionally, if you and your spouse can speak to one another without it devolving into an argument, you may want to talk about bankruptcy sooner rather than later. Working together on this aspect of your split is better than being at odds with one another.

Even though it might mean that you have to get bankruptcy before divorcing, and it could push back the timeline of your divorce, it is well worth considering. Get in touch with an attorney today and discuss your options.

 

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