Bankruptcy and divorce are two unfortunate events many American’s face. Sometimes, these events are intertwined and happen during the same time period. This leaves many distressed people wondering if bankruptcy or divorce should be filed first.
Determining when to file for bankruptcy and divorce depends on many factors, and no two cases are exactly alike. There are three important decisions to be made.
Should you file for Chapter 7 or Chapter 13 bankruptcy?
Will you file individually or jointly?
Should you file before or after your divorce?
Read on for the top factors to consider when making these important decisions.
Bankruptcy Types & Exemptions
First, you need to understand the difference between Chapter 7 and Chapter 13 bankruptcy, and how exemptions apply to each.
In a Chapter 7 bankruptcy, all of your non-exempt assets are liquidated to pay for your debt, and most of your debt is discharged. Chapter 7 bankruptcy is designed for people with limited income and lack the ability to pay back their debts. To qualify you must pass a means test.
Chapter 13 bankruptcy is a debt reorganization bankruptcy that allows you to keep your property. It’s designed for people who fail the means test and have the ability to pay back some or all of their debt. The value of your non-exempt property is used in calculating your repayment plan. Once you’ve met the terms and conditions of your repayment plan, any remaining eligible unsecured debt will be discharged.
Chapter 13 bankruptcy can take 3-5 years to complete, whereas Chapter 7 bankruptcy can be completed within months.
Factors to Consider
If you elect to file for bankruptcy prior to your divorce, you have the option of filing a joint bankruptcy petition or an individual bankruptcy petition. If you decide to file after divorce, you’ll file an individual bankruptcy petition.
When making your choice between bankruptcy types, whether to file jointly or individually, and when to file, consider the following factors:
Filing Fees and Attorney Fees
One advantage to filing for bankruptcy jointly prior to your divorce is the money you will save. The filing fees for a joint bankruptcy are the same as if you file by yourself. The same typically applies to attorney’s fees. If you and your spouse can work together amicably, this is one way to reduce your bankruptcy expenses.
Household Income & Means Test
If you and your spouse’s combined income is too high, you won’t pass the means test or qualify for a Chapter 7 bankruptcy. In that case, waiting until after you’re divorced to file for bankruptcy may be most beneficial.
If you’re planning on filing Chapter 13, your combined income may work to your advantage, proving that you can afford your repayment terms.
In Texas, there is an unlimited homestead exemption for property totaling 10 acres or less in a town, or 100 acres or less in a rural area. Even if the home you own and reside in a multi-million dollar home it is exempt from your bankruptcy.
The catch is, it only applies to one home. If you and your spouse happen to own multiple homes, you might want to consider filing bankruptcy after your divorce, which would allow each of you to keep a house.
However, there are exceptions to this rule, taking things into account such as where your dependents reside, and how much equity you have in each home. You’ll need an experienced bankruptcy attorney to help you sort through the details.
Motor Vehicle Exemption
In Texas, one vehicle per licensed driver, regardless of the vehicle's value, is usually exempt. If you file before or after divorce you’ll get to keep your personal vehicle, so in this case there is no real advantage or disadvantage to when you file.
Personal Property Exemption
Personal property exemptions are laws that allow individuals to protect certain property from creditor claims. A single person is limited to $50,000 in personal property exemptions. A family is limited to $100,000 in personal property exemptions. Simple math would say there is virtually no difference in filing solo or married, however, there are exceptions.
For example, if one spouse has $75,000 worth of personal belongings and the other has $25,000 there is an advantage to filing together. This would allow the spouse with the larger amount of personal property to keep all of their belongings. If you file separately, the spouse with $75,000 worth of personal property would be forced to surrender $25,000 of their assets or have the value calculated into a Chapter 13 debt repayment plan.
If each spouse has less than $50,000 worth of personal property (jewelry, family heirlooms, furniture, etc.) there is no real advantage to filing before or after divorce.
If you file for bankruptcy prior to your divorce it can expedite the process of sorting through and dividing up marital assets. However, one important aspect to consider is how amicable you and your soon to be ex are. If you decide on Chapter 13 bankruptcy you’ll be stuck working together through the 3-5 years of your repayment terms.
There are numerous other factors to take into consideration when deciding if filing for bankruptcy before or after divorce is best for you. An experienced bankruptcy attorney will use their expertise to guide you through the process and help you make decisions that are in your best interest.
Contact The Law Offices of Marilyn D. Garner Today!
If you’re still not sure whether filing for bankruptcy jointly before divorce or individually after divorce is best for you, let an experienced bankruptcy attorney help you decide. Call the Law Office of Marilyn D. Garner NOW at (817) 505-1499 for a free consultation to discuss your options and start the next chapter of your life.