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Facing Divorce and Bankruptcy: Which Should Come First?

Divorce and bankruptcy can be difficult and traumatic experiences. Unfortunately, some people suffer both in short succession. Financial problems often lead to marriages dissolving and divorce typically has financial consequences for both spouses. Although it is possible to file for divorce and bankruptcy at the same time, this is usually impractical. A common question is whether the bankruptcy or the divorce should come first. The answer is highly dependent on the facts and circumstances of each situation.

In certain circumstances, filing bankruptcy first is preferable. If most of the debts are jointly held by both spouses, it is more efficient to discharge them in a joint bankruptcy before they are apportioned in a divorce. Also, legal fees can be lower in this scenario. One attorney can represent a married couple in a joint bankruptcy, but not so if they are divorced. In addition, a married couple may be able to take better advantage of exemptions, which are types of property that a debtor may shield from creditors during bankruptcy. Certain exemptions are larger for married couples, so both parties might keep more assets by holding off filing for divorce after the bankruptcy case is closed. A family law attorney who understands the bankruptcy code can provide specific guidance.

Another potential reason to file bankruptcy first is to take advantage of the automatic stay. When a bankruptcy petition is filed, all collection efforts against the debtors are automatically suspended temporarily. For example, if a lender is about to foreclose on a couple’s residence, the automatic stay requires putting the case on hold until and unless the bankruptcy court rules it can proceed. This can give the spouses time to take steps to save the home from foreclosure

In other situations, it makes sense to file for divorce before bankruptcy. If the spouses will be filing a Chapter 13 bankruptcy case — which calls for paying off a portion of debt over a three- to five-year period — it would be difficult to remain married throughout the length of the plan. Most people whose marriages have failed would want the divorce to be completed in much less time. In addition, personal bankruptcies have maximum income thresholds. Married couples filing joint bankruptcy petitions can be disqualified if they earn too much money as a couple. By divorcing and filing for bankruptcy as individuals, both parties might be below the income threshold that would otherwise disqualify them.

Sterling Heights-based Dawson Family Law, PLLC provides legal counsel in domestic relations cases throughout Michigan. We each client with the compassionate guidance and individual attention needed to achieve the best results under the circumstances. Feel free to contact us or call 833-671-4445 for an initial consultation.

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