Bankruptcy and Divorce

If bankruptcy and divorce matters arise at similar times, you will likely have questions about obligations and what you can and cannot discharge in a bankruptcy. It is important to understand the differences between dischargeable and non-dischargeable debts or obligations.

It’s important to understand Kentucky divorce laws when filing for divorce-related bankruptcy. In Kentucky, domestic obligation debts such as alimony (spousal support) and child support cannot be discharged in a bankruptcy. However, you can consolidate back support and pay it off through a Chapter 13 bankruptcy.

Our Louisville bankruptcy attorneys know the law and will work on your team to help you get debt relief. We have significant experience representing those in Chapter 7 bankruptcy and Chapter 13 bankruptcy matters involving divorce. We also have a core group of lawyers with specific experience in this area.

Please contact our bankruptcy lawyers to schedule a free initial consultation. Call our Louisville office at 502-339-0222. We schedule consultations at any of our four offices. Evening and weekend appointments are available by request. We also handle legal separation in Kentucky.

How Do Bankruptcy and Divorce Affect Each Other?

Here’s the first important fact to know: bankruptcy does not stop divorce, child custody disputes, or support obligations. However, it does postpone the distribution of assets until after you finish your bankruptcy case.

Generally, most people prefer filing for Chapter 7 bankruptcy. It’s faster than Chapter 13 bankruptcy, as it only takes around three or four months to finish. Also, it erases certain debts without requiring you to repay your creditors. You also have the option of keeping or “exempting” the property that you require to work and live. 

Bankruptcy mainly affects divorces by delaying the distribution of assets. The bankruptcy trustee in your case will keep most of the assets in your bankruptcy estate. Then, they will sell off what you cannot exempt. Lastly, they allocate those funds to your creditors.

The Chapter 13 procedure is a little different. If you file for Chapter 13 bankruptcy as a married couple, you both maintain responsibility for the three to five year repayment plan.

Filing for Bankruptcy Before Divorce

Filing for bankruptcy before divorce actually benefits you in a multitude of ways. For starters, it allows you to pay only one filing fee and split the cost of your legal counsel for bankruptcy. It also has the potential to help your property division go more smoothly. In a typical divorce process, the court divides both the assets and the debts. However, if you file for bankruptcy before divorce, you can discharge your unsecured debts. Then, the court will not split those debts, and neither you nor your spouse will pay for them.

Additionally, if the judge in your case orders your spouse to pay a shared debt, this court order does not affect your creditor. Because your creditors are not part of your divorce, they have the option to go after you or your spouse for payment. Not obtaining a discharge on a debt means the creditor can collect what you owe, regardless of the court order. However, if you receive a discharge for that debt, the creditor may no longer engage in collection activities against it.

Filing for Bankruptcy and Divorce at the Same Time

For a variety of reasons, filing for bankruptcy during a divorce is typically not a good decision. This is due to the fact that your divorce and bankruptcy proceedings will have an influence on one another, leading to the cases being delayed. Your non-exempt assets become part of your bankruptcy estate when you file for bankruptcy. This implies that until your bankruptcy case concludes, the judge in your divorce case cannot split your assets. If you’re going through a divorce, alimony and child support difficulties might delay your bankruptcy case. Instead of filing both bankruptcy and divorce at the same time, it is preferable to file one first.

Filing for Bankruptcy After Divorce

Some divorcing couples choose to finalize their divorce before worrying about filing for bankruptcy. This helps in cases where you plan to file for Chapter 13 bankruptcy if you want to keep more of your assets. You might also file for Chapter 13 if your income is too high to qualify for Chapter 7. However, if you and your spouse both plan to file for bankruptcy, waiting until after you finalize the divorce will likely result in higher legal fees. This is because you will pay separate filing and legal fees.

If you and your spouse can’t get along, waiting until after your divorce to apply for bankruptcy protection may be advantageous. If your divorce is contentious, it is better to wait until the divorce is final before filing for bankruptcy. This may enable you to seek a debt discharge without having to rely on your spouse cooperating with you in your bankruptcy case.

Additionally, waiting until after finalizing your divorce may allow you to file for Chapter 7. The combined income of you and your spouse might have prevented you from filing for Chapter 7. If your separate incomes open the door for Chapter 7, it’s a good idea to wait until after the divorce finalization.

Chapter 7 Bankruptcy vs Chapter 13 Bankruptcy

There are a few drawbacks to filing for bankruptcy before your divorce. If you want to file for Chapter 13 bankruptcy rather than Chapter 7, it could be a good idea to wait until after your divorce is finalized to submit your bankruptcy case. Because of the distinctions between these two forms of bankruptcy, this is the case.

A liquidation bankruptcy is also known as a Chapter 7 bankruptcy. Your non-exempt assets will be liquidated in Chapter 7 bankruptcy to repay a part of what you owe to your creditors. In many situations, a debtor’s assets are excluded, which means that you may lose very few assets in a Chapter 7 bankruptcy. Chapter 7 bankruptcy proceedings typically last only a few months and can relieve you and your spouse of unsecured debt repayment obligations. You must, however, be able to pass the means test in order to file this form of bankruptcy.

A Chapter 13 bankruptcy, on the other hand, is a kind of bankruptcy that requires you to sign into a three- to five-year repayment arrangement. If you and your spouse file for Chapter 13 bankruptcy prior to the divorce, your joint repayment plan will take a long time to complete. It may not be a smart idea to declare this form of bankruptcy before you divorce unless you and your spouse are very cordial.

Income Requirements for Chapter 7 Bankruptcy

So, how much does it cost to file bankruptcy? If you plan to file a Chapter 7, deciding whether to do so before or after a divorce may come down to income if you keep a single household. You must mention your combined income in the bankruptcy if you want to file jointly. You may not be able to qualify for a Chapter 7 if your combined income is too high and you fail the Chapter 7 means test.

Even if each spouse’s income is low enough to qualify on their own, this can happen. This is due to the fact that Chapter 7 income limitations are dependent on family size, and the maximum for a two-person home is not double that of a single-person household. It’s generally only slightly higher. In that situation, it may be important to postpone filing bankruptcy until each spouse has their own home following the divorce.

Property Division in Bankruptcy and Divorce

The property division process in a divorce will be simplified if you jointly wipe out your debts through bankruptcy. However, before you file a combined bankruptcy, be sure your state provides adequate exemptions to preserve all of the property you and your spouse hold. When filing jointly, several states enable you to double your exemption amounts. If you possess a lot of property, filing a joint bankruptcy may be a preferable option if you can double your exemptions.

If you have more property than you can exempt in a combined bankruptcy, filing separately after the property has been divided in the divorce may be more favorable. Also, bear in mind that if you file for bankruptcy while your divorce is still pending, the automatic stay will prevent the property partition process from proceeding until the bankruptcy is finished.

Discharged Marital Debt

In a divorce, determining whose debts should be assigned to each spouse may be a time-consuming and expensive procedure. Furthermore, a divorce decision that requires one spouse to pay a specific debt does not affect the other spouse’s responsibilities to that creditor.

Let’s assume your former spouse had to pay a joint credit card you both held throughout your marriage. If they don’t pay it or declare bankruptcy, you’re still responsible for the obligation, and the creditor can pursue you for payment. Because your ex-spouse broke the divorce agreement, you have the right to be repaid if you pay the amount. This is true even if they filed for bankruptcy, because they can discharge their debt to the creditor but not their responsibilities to you under the divorce decree.

Attempting to collect from your former spouse, on the other hand, generally entails paying more money to pursue them in court. As a result, filing for bankruptcy and wiping away both parties’ total debts before a divorce may be in both spouses’ best interests.