Divorce and Bankruptcy
Avoid These Common Mistakes When Filing Bankruptcy and Getting Divorced
One of the most common reasons that married couples divorce is because of financial issues. These couples can turn to bankruptcy and divorce, legal procedures to dissolve both their debts and their marriage. If you are considering filing for both, you need to understand how bankruptcy and divorce interact under your personal circumstances.
When To File
Avoid filing Chapter 13 bankruptcy if you know you want a divorce in the near future. Which should you file first, bankruptcy or divorce? This can depend on a variety of factors, the first of which being the chapter you choose to file. Most personal bankruptcies are filed under either Chapter 7 or Chapter 13 of the Bankruptcy Code. Chapter 7, which is only available to those under certain income levels, liquidates debts without repayment. Chapter 13 reorganizes debts into a payment plan that lasts either 3 or 5 years.
Some filers may qualify for Chapter 7 bankruptcy, but choose to file Chapter 13 bankruptcy anyway. This is because Chapter 13 allows those who are behind on payments like their mortgage and car loan to catch up over those 3-5 years and keep the asset as well. It can also be used for priority debts like child support and spousal maintenance, which can’t be discharged in Chapter 7 and can garnish your wages at a much higher rate than typical debts. The Chapter 13 plan will be based on your income at the time the petition was filed. This can make filing a Chapter 13 while still married tricky. Your payment plan will be based on your combined income, so unless your spouse doesn’t work, affording the payments that are calculated on a dual income will be nearly impossible. Chapter 13 plans will leave you with very little disposable income at the end of each month- definitely not enough for one spouse to go out and rent a new home. Divorcing will become exponentially more difficult for the 3-5 years the payment plan lasts.
Filing Chapter 7 Before a Divorce
Avoid paying costs for two separate bankruptcies if you can wait a few months to file divorce. While filing a Chapter 13 bankruptcy before a divorce usually isn’t a good idea. However, Chapter 7 BK is a much faster process, and filing it before divorce can have many advantages. One of these is that it reduces the amount of time you will need to spend on property division in the divorce. Arizona is a community property state, so both assets and debts that were acquired while the couple was married will be split evenly if they divorce. One spouse may agree to pay more than their fair share of the community debts in exchange for keeping valuable shared assets like the marital home, pets, furniture, and vehicles acquired during the marriage. However, if the spouse who agreed to paid debts later discharges them through Chapter 7 bankruptcy, the creditors may still pursue the other spouse for payment. If the couple files Chapter 7 while they are still married, the debts will be discharged as to both of their names. This also saves time (and hourly attorney’s fees) on asset division during a divorce.
Chapter 7 is a much faster process than Chapter 13. A typical Chapter 7 bankruptcy only lasts 3-6 months, compared to the 3-5 years a Chapter 13 takes. This makes it more feasible for couples who know they want to get divorced to proceed with a bankruptcy first. This will save the couple bankruptcy costs compared to filing bankruptcy separately after the divorce. The filing fee for a Chapter 7 is $335 whether it is a single or joint filing. Attorneys typically do not charge much more for representation of a married couple than a single filer. Anyone who files bankruptcy is also required to take two online bankruptcy courses, which a married couple can take together but single filers will have to take, and pay for, separately.
Filing Chapter 7 After a Divorce in Arizona
Avoid filing for Chapter 13 bankruptcy if you would qualify for Chapter 7 after you divorce your spouse. While filing bankruptcy while still married can save a married couple time and money, it is still sometimes better to wait until a divorce is finalized to proceed with a Chapter 7 bankruptcy. There are strict income limits for Chapter 7 filers that may be easier to meet when the spouses are no longer married.
There are only two ways to qualify for a Chapter 7 bankruptcy in Arizona. One of these is the Means Test. This will combine the couple’s average monthly incomes and deduct necessary expenses. If the number left is negative, the couple will qualify. However, most filers looking to qualify for Chapter 7 simply compare their income to the median income level for their state. If their income is less than the state median, they automatically qualify for Chapter 7.
In Arizona, the median income for a married couple is $65,713. This number increases to $71,704 if the couple has a minor child, $86,950 if they have two, and so on. This makes it difficult for spouses who are both employed, especially those that don’t have minor children, to qualify. If they divorce first, their bankruptcies- and income- can be separate. The spouses should consult a bankruptcy attorney to determine if filing bankruptcy after divorce will allow them to qualify for Chapter 7, and who would be able to claim the child as a dependent for the purposes of income qualification.
Only One of Us Wants to File. Now What?
If only one of you wants to file bankruptcy, you can still proceed with a Chapter 7 without including your spouse. However, debts will only be discharged as to your name. Your spouse will be protected while you are still married but your creditors will pursue your spouse for the discharged debts if you divorce. Your spouse’s income will still be included with your own for qualification purposes. Filing Chapter 13 without your spouse’s cooperation simply isn’t feasible.
Divorce can be filed unilaterally, meaning if one spouse wants to divorce, it can proceed even if the other spouse doesn’t want to divorce. The spouse who files for divorce, the petitioner, will list their preferred terms of the divorce in the petition. If the other spouse, the respondent, refuses to answer the petition, the petitioner will be granted a default order.
Do I Need an Attorney?
Avoid proceeding with a bankruptcy or divorce unrepresented. You should always at least consult with an attorney before proceeding with a legal matter, even if you end up choosing to represent yourself. Many attorneys offer consultations at no cost to you. You should also consider consulting with a full service law firm, meaning it handles many types of cases, including bankruptcy and family law. These attorneys are best equipped to help you strategize the timing of your divorce and bankruptcy. They will also help you confirm which chapter/s of bankruptcy you qualify for.
Uncontested, amicable divorces can often be resolved without hiring attorneys. If the couple has been married for a significant period, has minor children together, or acquired significant debts and assets during the marriage, this complicates the divorce and often requires legal representation. Bankruptcy filers who proceed pro se, or without an attorney, stand a decent chance in Chapter 7. Approximately ⅔ of those cases are successfully discharged. Pro se Chapter 13 filers have a success rate of less than 1 percent.
If you need help with bankruptcy, divorce, or both, our office is here for assistance. We offer free phone consultations in both types of cases, as well as reasonable attorney’s fees and payment plan options. The best legal representation doesn’t have to break the bank- learn for yourself by scheduling your free consultation today.
Divorce and Bankruptcy FAQs in Arizona
Divorce is the legal dissolution of a marriage. When one or both spouses decide they no longer want to be married, one will file a divorce petition and have it served on their spouse. The spouse who files the petition (the petitioner) will request all their desired terms of the divorce in the petition. When the other spouse (the respondent) is served, they must respond within 20-30 days. If the respondent fails to answer the petition, the judge will issue a default order granting everything the petitioner requested. If the respondent disagrees with the petition and files their response with the court, the case may proceed to trial. During the trial, the judge will rule on issues regarding child custody and support, spousal support, and property division.
Bankruptcy is a legal way for people struggling with debt to either liquidate or reorganize those debts through Chapter 7 or Chapter 13, respectively. Chapter 7 is a 4-6 month process that liquidates unsecured debts, but has strict income limits and asset exemptions. Chapter 13 reorganizes debts into a 3-5 year repayment plan calculated to pay off as much debt as possible using all of the filer’s disposable monthly income.
You can file both cases separately, and which you should file first will depend on your specific situation. Filing both at the same time can make things far more complicated than they need to be. When you file both Chapter 7 and Chapter 13 bankruptcy, a legal mechanism called the Automatic Stay goes into effect. This freezes your assets so that your creditors can’t garnish or repossess them. This also freezes your assets for the purposes of asset division in a divorce.
When the Automatic Stay freezes your assets during a divorce, the property division portion will be slowed down, if not stopped until the bankruptcy is completed. If you are in a Chapter 13 and both of you earned income, you may be able to have your plan restructured into two separate plans or converted into a Chapter 7. Otherwise, you will need to have your case dismissed.
If you only qualify for Chapter 13 bankruptcy, your best bet is almost always to wait until after a divorce to file. Your Chapter 13 plan will be calculated using you and your spouse’s income if you are still married, and unless you were a single earner, you probably won’t be able to afford your payments after the divorce. You will also be legally entangled with your ex spouse for another 3-5 years.
Filing bankruptcy before divorce has its advantages if you qualify for Chapter 7. You and your spouse will be free from any community debts you have and not spend time and attorney’s fees resolving that during your divorce. You will also save money on filing and attorney’s fees because you can share your attorney instead of each hiring your own. However, you may have an easier time qualifying for Chapter 7 after a divorce.
You will only receive limited protections from your creditors if your spouse files bankruptcy on their own. Keep in mind that if your spouse discharges community debts in a single bankruptcy, those creditors could pursue you for those debts if you were ever to divorce.
Debts that are secured to assets usually go to the spouse who keeps the asset. All other debts incurred during the marriage will be split evenly between the spouses unless they agree to a different arrangement. This is because Arizona is a community property state, so debts incurred and assets acquired during the marriage belong to both spouses equally.
If you incurred credit card debt and other personal debts during your divorce to make ends meet, these will likely be dischargeable in your bankruptcy. You may also incur debts because you are adjusting to living on a single income. In bankruptcy, you can surrender a vehicle or lease you can’t afford or discharge a repossession deficiency. However, if you are behind on child and spousal support you were ordered to pay in a divorce, these debts can’t be discharged in bankruptcy. Chapter 13 allows you to spread out your past-due balance over 3-5 years, but there is no way around paying your full arrearages in bankruptcy. Attorneys fees for family law matters are usually non-dischargeable as well.
If you and your spouse didn’t have any debt at your divorce or have since paid it off, this will not affect you. If your spouse was ordered to pay community debts in your divorce and has filed a Chapter 13, this won’t affect you unless their case ends up dismissed, and your spouse continually misses payments on community debts after the dismissal. If your spouse was ordered to pay community debts in your divorce and has filed a Chapter 7, these creditors will likely pursue you for the debts once the case has been discharged. You will either need to pay or settle the balance, or file bankruptcy yourself.
There may be a conflict of interest for an attorney to represent you in both matters, depending on the order and chapter you file. Even if an attorney can only represent you in one of the matters, you should still consult a full service law firm if you are considering both bankruptcy and divorce. An attorney who specializes in both divorce and bankruptcy will be the best equipped to answer your questions about both of your legal matters. If you’re looking for a full service law firm in Arizona that offers competitive rates, call our office today to schedule your free consultation.