By Theresa Rose DeGray
Bankruptcy
Theresa Rose DeGray
The top five reasons most of my clients file for bankruptcy are (1) loss of income, (2) foreclosure, (3) medical crises, (4) overspending, sometimes tied to an addiction or gambling and (5) divorce.
I see clients at all stages of the divorce process: before, during and after.
When I meet with clients before they file for divorce, or after the case is filed but before the date of dissolution, they often ask me if it is best to file for bankruptcy before or after they finally get divorced. It’s kind of like the chicken and the egg. What comes first?
In this case, my answer is always “it depends.” Because it does: it ultimately depends on if and how they qualify. Qualification is based solely on income – income based on a median for your state and household size. As I write this article, a household of four is allowed to make up to $142,596 (gross annual combined income) and still file for bankruptcy. But if the parties are physically separated, yet not legally divorced, they can be tested for qualification based on their individual household size. So “it depends,” and it gets complicated.
If you are contemplating a divorce or in the process of getting divorced, it would be wise to consult an attorney like me who practices in both the bankruptcy and divorce law areas, to analyze your financial circumstances, ensuring all of your obligations will be accounted for in the divorce decree/separation agreement, and to determine if you can handle paying them once you go back to a single income after the divorce. Bankruptcy may be a safe option once you are divorced if you find you cannot afford living on a single income supporting debt.
If you will be taking the bulk of the debt once you separate and do not have the income to support it, you may consider filing for bankruptcy and starting over altogether once the divorce is finalized. Here are some topics that often arise from divorce when contemplating a bankruptcy or may lead you to the necessity of filing for bankruptcy after your divorce:
1. Who will take the marital home and pay its related expenses? If you are getting a divorce and taking over possession of the marital home, along with taking over the related expenses, especially the mortgage(s) on the home, be sure to have your divorce decree state the terms of this transfer accurately.
Making a budget before the divorce is final will also help you determine if you will be able to afford to stay in the home.
If it is determined that you can, in fact, afford to live in the home after the divorce, then make sure the proper documents are recorded on the land records after the transfer. This will give you a paper trail you may need to provide in your bankruptcy case later on.
2. Will you be responsible for credit cards in your ex-spouse’s name? If so, make sure the divorce decree/separation agreement spells out all debt you will be taking responsibility for once the divorce is final, along with the last four digits of any account numbers. Be advised that no bankruptcy of one person will discharge debt in another person’s name. So if it is joint debt you are taking on, be sure to contact the creditors and see if you can have the other person’s name removed. Also, remember to check your credit report once every three months or so to make sure everything is reported accurately. If you are ordered to pay your ex-spouse’s debts, they will never be dischargeable in your bankruptcy.
3. Will you be ordered to pay alimony or child support? Keep in mind that court-ordered domestic support obligations such as alimony and child support are what is known in the bankruptcy world as “priority debt” and cannot be discharged in most cases. It is vitally important to have all obligations in this category fully defined and explained in your divorce decree/separation agreement, as you will likely be fulfilling these obligations regardless of ever filing for bankruptcy.
Filing for bankruptcy before, during or after a divorce is not the end of the world. In fact, it may be the best thing that ever happened to you, and will help you to move on and start fresh.