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Guide to Divorce and Bankruptcy

Divorce can be an expensive endeavor, leaving many formerly married couples on a financial precipice. Filing for bankruptcy is always an option, but is it the right one? It depends.

Does divorce cause bankruptcy, or does bankruptcy cause divorce?

Since many factors contribute to both situations, it can be difficult to pinpoint which came first. At the heart of the issue are several stressors and financial challenges that often arise because of divorce.

For example, debt and property division is a complex and time-consuming process that can significantly strain both people. Couples who separate after many years together may face huge changes in their standard of living, particularly if one partner was financially dependent on the other.

Is it better to file for bankruptcy before or after divorce?

Both approaches have pros and cons. The “best” approach depends on factors specific to your situation.

Going through the bankruptcy process before getting divorced may be a good option for those who are struggling financially, especially if the source of the debt is a marital purchase or shared expense. In that case, filing for bankruptcy may provide each person a fresh start, allowing them to focus on rebuilding their finances without the burden of marital debt hanging over their heads.

That said, bankruptcy filing before divorce has potential downsides. Doing so could negatively affect your divorce case and subsequent settlement agreement, making it more difficult to get fair terms. It could also affect whether certain debts still have to be paid back.

Why do people file for bankruptcy after divorce?

The financial strain of a divorce can leave some individuals with unmanageable debt, making it difficult to keep up with their monthly payments. Many people who go through a divorce also experience a significant drop in income which can further exacerbate their struggles.

Other factors that may contribute to bankruptcy filing after divorce include the high costs associated with legal fees and child support or spousal support/alimony payments.

Filing for bankruptcy after divorce is an option if your debts arise post-divorce. However, if you’re grappling with joint debts as a married couple, you may benefit from filing for joint bankruptcy before you divorce.

What happens if my spouse declares bankruptcy?

If your soon-to-be ex-spouse declares bankruptcy, your divorce process may be impacted. Why? Marital debt and property division are important aspects of most divorce proceedings. Your spouse’s new financial status could delay or complicate your divorce process, depending on how much they owe and whether you share in the burden.

Another potential effect is a financial strain for you. If your spouse's debts are discharged, you may become responsible for paying some or all of the debts yourself, if anything is still owed after bankruptcy proceedings are complete. This could cause significant hardship for you, especially if your former spouse was the primary breadwinner in your marriage.

How does bankruptcy affect child support obligations?

It is important to understand that not all debts are dischargeable in bankruptcy. Child support obligations are considered non-dischargeable debt, so even if a person files for bankruptcy, they may still be responsible for child support payments. This can create significant financial hardship for parents who already struggle to make ends meet.

Bankruptcy might also affect child support by changing the terms of the arrangement. It depends on the type of bankruptcy filed and other factors, such as income and assets. Parents may find the need to modify their child support payments in order to comply with their new financial circumstances.

What are the benefits of bankruptcy for a divorced person?

Declaring bankruptcy offers several benefits, including relief from the financial strain of divorce. For many people going through a divorce, their financial situation is already unstable or precarious. Keeping up with monthly debt payments — mortgages, car loans, credit card debt, medical bills — can feel overwhelming.

Bankruptcy provides a way for a divorced person to erase debt and start over. Additionally, it can help protect assets like property or retirement savings they may have received from their former spouse in their marital settlement agreement.

In some circumstances, filing for bankruptcy can help a divorced person regain control over their finances and work toward financial health.

What is the difference between Chapter 7 bankruptcy and Chapter 13 bankruptcy?

Chapter 7 bankruptcy allows you to discharge debt by selling certain assets and using the proceeds to pay back your creditors. This type of bankruptcy is often seen as a last resort for those who are overwhelmed by debt and unable to make payments on outstanding debts.

Chapter 13 bankruptcy involves entering a repayment plan with creditors in which you agree to make regular payments over a set period. Unlike Chapter 7 bankruptcy, you typically get to keep most or all of your assets under a Chapter 13 plan. This makes Chapter 13 bankruptcy suitable for those who struggle with debt but also have valuable assets they want to protect from creditors.

How long does bankruptcy stay on your credit report?

It depends on the type of bankruptcy you've filed. Chapter 7 bankruptcy may stay on your credit report for up to 10 years. Chapter 13 bankruptcy may only stay for seven years, assuming you successfully achieve your repayment plan goals.

Is bankruptcy my only option?

Bankruptcy is not your only option. There are ways to get debt relief and free or reduced-rate legal advice. 

One of our passions at Hello Divorce is helping people survive divorce without losing their financial footing. As such, we offer inexpensive online divorce plans with varying degrees of professional help, depending on your circumstances. We also offer flat-rate a la carte services such as divorce mediation, financial planning with a certified divorce financial analyst (CDFA), and legal advice sessions with a divorce attorney.

Click here to view our calendar and schedule a free consultation by phone to learn more.