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Bankruptcy During Divorce: How They Interact

If you need to file for divorce, you might be understandably hesitant to see what the future holds for you. Regardless, you have it under control and you can get through it. Or maybe you need to file for bankruptcy? It is an intimidating process that can be rife with complications but, once again, it is nothing you can’t handle. But what happens if you are going through a divorce and need to file for bankruptcy? Now things are getting trickier.

How to Reduce Your Filing Costs

Many people who were in a financially stable position are actually driven towards bankruptcy as a result of divorcing. Others are already in financial straits before divorce is brought up. In either situation, going through bankruptcy before finalizing your divorce could potentially save some money.

If your soon-to-be ex-spouse files for bankruptcy with you, it can count as a joint bankruptcy filing. This will essentially save you 50% on bankruptcy filing fees because it is just one process, rather than two separate ones. Deciding to stick together one last time to complete a joint filing can also make debt division and property distribution much easier since everything that could be collected by creditors in your bankruptcy will already be gone and not pending division. On a more positive note, a joint filing often doubles the exemptions granted to the bankruptcy petition, allowing you to keep more of your property than if the both of you filed separately.

Fast & Slow Bankruptcies

You must also consider which form of bankruptcy you are going to use to resolve your debt issues. If you are filing for Chapter 7, sometimes called liquidation bankruptcy, it could be over within the year, so you could file for bankruptcy first, complete it, and then divorce without dragging things out for an extended period of time. On the other hand, Chapter 13 bankruptcy always relies on a debt restructuring plan that is paced out over three to five years. If you are planning on divorcing and need to use Chapter 13, the divorce should come first, or else you will be waiting a couple years at least.

Passing the Means Test Due to Divorce

Chapter 7 bankruptcy is a powerful tool that can wipe out huge portions of debt entirely. In order to make certain the people who really need it are the ones who use it, a means test is required for eligibility. Petitioners who make more than the average household in their state, based on annual incomes and earnings, will fail the means test and cannot use Chapter 7 bankruptcy.

How does divorce relate to the means test? If you aren’t divorced and file a joint bankruptcy, your combined incomes may cause you to climb over the statewide average, and you may fail the means test. If you finish your divorce first, you can file separate bankruptcies and only your income will be measured; feasibly, this could cause you to drop under the average and pass the means test, enabling Chapter 7 bankruptcy.

Sort Through the Complications with Confidence

In all the many ways that divorcing can affect bankruptcy, and vice versa, the common theme is intricacy. You will need to know what you are doing, where your end goal remains, and how it is going to affect your family. Let Holstrom, Block & Parke, APLC and our Southern California divorce attorneys be the ones to help you make sense of the complexities and make the decisions that benefit you most.

200+ years of combined legal experience can be on your side – contact us today.

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