A combination of financial woes and marital turmoil can put a couple on the horns of a dilemma. Should they file for divorce and then bankruptcy, or the other way around? Both divorce and bankruptcy have significant impacts on personal finances and future stability, and the order in which these steps are taken can matter. The best course of action depends heavily on each couple’s unique circumstances, their assets, the types and amount of debt they share and their personal goals moving forward.
Filing bankruptcy before divorce is advantageous in certain situations. For couples whose debts are primarily shared, addressing these obligations together in a joint bankruptcy allows both partners to tackle their debts collectively. It can potentially wipe out much of what they owe before the property and liabilities are divided in a divorce proceeding. This can simplify the divorce because there will be fewer debts to apportion, reducing the potential for disputes. Additionally, joint bankruptcy may cut down on legal expenses, since one attorney can represent both parties in the bankruptcy so long as their interests do not conflict. Once divorced, each spouse must have separate representation.
There are other financial benefits to filing bankruptcy first. Federal and state law provide exemptions that allow bankruptcy filers to shield certain property from creditors. By doubling these exemptions, a couple is likely to retain a larger portion of their property than if each spouse filed individually post-divorce. This can maximize asset retention and minimize residual debt. Filing bankruptcy first also lets both spouses benefit from the automatic stay that goes into effect when a bankruptcy petition is filed. The stay requires creditors to temporarily halt collection efforts, including foreclosures and lawsuits. If a couple is facing imminent threats like home foreclosure, the stay can give them valuable time.
However, there are situations in which initiating divorce before bankruptcy is the wiser path. A primary example is when one or both spouses anticipate filing for Chapter 13 bankruptcy, which involves a multi-year repayment plan. Living together during this period is often impractical for couples in the midst of a marital breakdown. Completing a divorce first permits each party to handle their own bankruptcy case independently, each tailoring their repayment plan to their separate financial realities. Furthermore, a combined household income can make a couple ineligible under the means test for Chapter 7 bankruptcy. By divorcing, each spouse’s individual income may fall below the threshold.
Ultimately, the decision as to which process to begin first must carefully weigh the type and amount of debt, the possibility of joint exemption benefits and the emotional and logistical realities of the situation. Each path has its advantages and disadvantages, and missteps may have lasting consequences. It is advisable to consult with a divorce attorney who can help you protect your interests and make informed choices tailored to your unique needs.
Dawson Family Law, PLLC in Troy provides legal counsel to individuals throughout Michigan in divorce and other family law matters. Please contact us online or call 586-514-0084 for a consultation.
