Bankruptcy and Your Divorce

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For some California couples, timing essentially forces them to file for bankruptcy while simultaneously filing for divorce. Generally speaking, both legal processes can be emotionally exhausting and lengthy; and unfortunately, can complicate the other and cause unwanted delays. A family lawyer experienced in complex financial matters will be able to walk you through the process.

Bankruptcy, Finances, and Your Marriage

As we have discussed time and time again, finances are a main reason why couples divorce. Learn about the financial conversations every couple should have early on in their relationship here.  Briefly, during a Chapter 7 bankruptcy, also called “liquidation” or “straight bankruptcy,” your assets are sold, creditors receive payment, and you are freed from your debts. It’s available to individuals, married couples, corporations and partnerships. In a Chapter 13 bankruptcy, you keep your property, but pay back all or a portion of your debts over a three to five-year period.

Complications Associated with Filing Bankruptcy and for Divorce

In some instances, filing for divorce at or around the same time as filing for bankruptcy can cause complications for both parties. Common issues that arise include:

  • During a Chapter 7 bankruptcy, your community property is generally included in the bankruptcy estate.
  • Bankruptcy is a federal legal action and as such, takes priority over divorce, a state action.
  • A California family law court cannot divide marital property when it is tied up in a bankruptcy estate.
  • Making Chapter 13 payments under the repayment plan can become complicated when the divorce results in the formation of two separate households.
  • When one partner files for bankruptcy, creditors are likely to pursue repayment from the other partner, often making it necessary for that spouse to file for bankruptcy.

This list is not exhaustive. Be certain to talk to your family lawyer about finalizing one legal proceeding before beginning the other. Filing for divorce first is not always the best option, as there are many moving parts to consider. For example, if you file for bankruptcy prior to divorce, you can file jointly, which saves on court costs and related legal expenses. Bankruptcy filing fees are the same for joint and individual filings. Additionally, you may be able to double certain bankruptcy exemptions as a married couple. Lastly, by discharging joint debts during bankruptcy, you do not have to address them during property division for your divorce.

For high net worth couples, your combined income may make you ineligible to file for Chapter 7 bankruptcy. Therefore, if Chapter 7 is the route you want to go, it may be necessary to determine if waiting to file bankruptcy until after you finalize your divorce qualifies you for Chapter 7 bankruptcy instead of Chapter 13 bankruptcy.

For more information on financial issues related to your divorce, including bankruptcy, contact the expert Los Angeles family lawyers at Walzer Melcher LLP today.