Continuing our discussion on divorce and bankruptcy from the previous post Divorce and Bankruptcy Part 1, we now look on joint filing of bankruptcy, even if they are going through a divorce.

While it may be possible for both parties to cooperate with each other long enough to file a Chapter 7 Bankruptcy, I strongly discourage a divorcing couple to file a Chapter 13 Bankruptcy.  In a Chapter 13 Bankruptcy, the debtor(s) are required to pay a bankruptcy trustee a monthly payment over the life of the bankruptcy, 3 to 5 years.

If the debtors get divorced during a Chapter 13 Bankruptcy, it’s unlikely that they will continue to cooperate and each continues to contribute to that monthly payment.  It more likely that one of the debtors will just stop paying completely, leaving the other to carry the burden.  Even if the divorce court orders one spouse to make the payments, typically these situations have a high failure rate.  The spouse ordered to make the payments may not be able to afford it, may not want to continue with the bankruptcy and will likely be upset that they have to carry the burden of paying for it.

For your best option when filing bankruptcy while divorcing, be sure to consult a bankruptcy attorney.

"I’m planning on getting divorced, should I file bankruptcy now, after the divorce or should we file together?"

Probably the most frequent questions I receive as an Indianapolis bankruptcy attorney involve the effect of bankruptcy on divorce and vice-versa.  The two topics seem to go together as many bankruptcies result from expenses related to a divorce and from a debtor losing his/her spouse’s income; alternatively, many divorces are caused by money problems.

Before I can go any further in this topic I must explain the difference between a domestic support obligation (“DSO”) versus a property obligation.  A DSO is an obligation by a person to pay either child support or spousal maintenance to another person as a result of a divorce, paternity case or legal separation.  A DSO is a non-dischargeable debt in both Chapter 7 Bankruptcy and Chapter 13 Bankruptcy.  This means that you will still owe the debt even if filing bankruptcy.  On the other hand, property debt is debt that a person owes another person as a result of a divorce, and can be dischargeable through a Chapter 13 Bankruptcy. For instance, a husband and wife get divorced and the husband is ordered to pay his wife $200 per month in spousal maintenance, $600 in child support and $4,000 towards his ex-wife’s credit cards.  The spousal maintenance and child support are considered DSO’s and cannot be discharge in any bankruptcy.  His obligation to pay $4,000 toward his wife’s credit cards is dischargeable in a Chapter 13 Bankruptcy, but not a Chapter 7 Bankruptcy.

Each debtor’s situation is unique and must be analyzed by a competent bankruptcy lawyer who is familiar with both bankruptcy and the effects of divorce on bankruptcy.  If the debts are primarily in the debtor’s name alone then the debtor may consider filing bankruptcy prior to the divorce.  However, if there is significant debt in both the debtor’s and the spouse’s names, then the debtor may consider waiting until the divorce is finalized.  The reason is this - if the debtor files bankruptcy and gets rid of his/her debt prior to getting divorced, the spouse’s debt is still considered marital debt.  If there is outstanding marital debt, the court could order the debtor to pay a portion or all of the debt.  Even though the debtor’s debt was discharged in bankruptcy, he/she is still responsible for paying the debt listed in the spouse’s name.  If, instead, he/she waits to file a Chapter 13 Bankruptcy until the divorce is finalized, then he/she could get rid of all of their debt along with any non-DSO marital debt that he/she was ordered to pay under the divorce order.