Marital and financial problems often go hand in hand, and sometimes can reach the point where both divorce and bankruptcy are being considered. Deciding to file for divorce and bankruptcy at the same time is a complex decision that requires careful consideration of the timing and legal ramifications. The interplay between divorce and bankruptcy can significantly impact both proceedings.

The decision on whether to file for divorce or bankruptcy first depends on various factors, including the nature of your debts, your financial situation and state and federal law. 

Filing Bankruptcy Before Divorce

• Joint debts — If you and your spouse have substantial joint debts, filing for bankruptcy together before divorcing can simplify the debt discharge process. A joint bankruptcy allows you to eliminate or reduce debts together, which can lead to a cleaner financial slate for both parties post-divorce.

• Cost savings — Filing for bankruptcy jointly can save on filing fees and legal costs. Instead of paying for two separate bankruptcy filings, you share the expenses of one.

• Automatic stay — The automatic stay that takes effect upon filing for bankruptcy can halt collection actions, giving both parties relief from creditors during a highly stressful period.

Filing Divorce Before Bankruptcy

• Individual bankruptcy — If you and your spouse have significantly different financial situations or debt loads, it may be beneficial to file for divorce first. Post-divorce, you can file for individual bankruptcy, addressing your specific debts and financial challenges without involving your ex-spouse.

• Asset division — Divorce courts handle the division of marital assets, which can be complex if you have considerable property or joint accounts. Finalizing the divorce first provides a clear understanding of your financial standing and individual assets before entering bankruptcy.

• Income considerations — Bankruptcy filings require a means test to determine eligibility for Chapter 7 bankruptcy. Your combined income may exceed the threshold for Chapter 7, forcing you into Chapter 13 repayment plans. Post-divorce, your individual income might make you eligible for Chapter 7, offering a quicker and simpler resolution to your debts.

Divorce and bankruptcy proceedings can interact in a number of ways:

1. Automatic stay —The bankruptcy case’s automatic stay halts all collection activities, including those related to divorce proceedings such as property division or spousal support enforcement. However, this stay does not apply to actions involving child support or custody.

2. Property division — In a divorce, assets and debts are divided between spouses. If bankruptcy is filed before the divorce, the bankruptcy trustee may seize and liquidate joint assets to pay creditors, affecting the distribution of marital property. Conversely, if bankruptcy is filed after divorce, the property division agreed upon or ordered by the divorce court remains intact, with each party responsible for their assigned debts.

3. Support obligations — Bankruptcy does not discharge obligations related to alimony, child support, or equitable distribution payments. These responsibilities remain intact regardless of the bankruptcy filing.

Ultimately, whether to file for divorce or bankruptcy first depends on your unique circumstances. Consulting with both a divorce lawyer and a bankruptcy attorney can provide personalized advice that can help you make informed decisions that protect your financial future and personal well-being.

Clark & Schloss Family Law, P.C. in Scottsdale provides reliable, cost-effective representation in Arizona divorce cases. Call 602-789-3497 or contact us online to schedule a consultation.