Divorce and bankruptcy are two of the most stressful life events a person can experience. Unfortunately, for some individuals, these challenges overlap. If you and your spouse are facing significant financial difficulties along with the end of your marriage, you may be wondering how filing for bankruptcy could impact your divorce proceedings. In California, where community property laws dictate asset division, the timing and type of bankruptcy can play a major role in how your divorce unfolds. Understanding how bankruptcy affects divorce can help you make informed decisions during this difficult time.
Types of Bankruptcy
There are two common types of bankruptcy that individuals may file: Chapter 7 and Chapter 13. Each type has different implications for divorce and property division.
- Chapter 7 Bankruptcy: This is often referred to as a “liquidation” bankruptcy because it involves selling off non-exempt assets to pay creditors. Chapter 7 is generally completed quickly, within a few months. However, this type of bankruptcy can delay your divorce proceedings, as the bankruptcy court temporarily freezes all your assets until they are discharged or resolved. This can complicate the division of property during the divorce.
- Chapter 13 Bankruptcy: Known as a “reorganization” bankruptcy, Chapter 13 allows individuals to restructure their debt and create a repayment plan over several years. Unlike Chapter 7, Chapter 13 does not require liquidation of assets, but the repayment plan can span three to five years. Divorce during a Chapter 13 bankruptcy can be more complex, as the ongoing bankruptcy plan must be considered when dividing debts and property.
Timing of Bankruptcy and Divorce
Deciding whether to file for bankruptcy before or after a divorce depends on your financial situation and the nature of your debts. Here are some key factors to consider:
- Filing for Bankruptcy Before Divorce: In some cases, it may make sense for both spouses to file for bankruptcy together before starting the divorce process. This can simplify the division of property by wiping out many unsecured debts, such as credit card balances or medical bills, allowing for a cleaner financial slate during the divorce. Filing jointly before the divorce may also help reduce legal fees, as you can share the cost of a single bankruptcy filing.
- Filing for Bankruptcy After Divorce: On the other hand, some couples choose to complete their divorce before filing for bankruptcy, especially if only one spouse is considering bankruptcy. Filing individually after the divorce allows each spouse to manage their own debts separately. However, keep in mind that if the court orders one spouse to pay certain debts as part of the divorce settlement, bankruptcy may not discharge those obligations, particularly if they are considered “non-dischargeable” debts like child support or spousal support.
How Bankruptcy Affects Property Division in California
California is a community property state, which means that in a divorce, most property and debts acquired during the marriage are divided equally between the spouses. Bankruptcy can significantly affect this process, especially if one or both spouses are seeking debt relief.
- Chapter 7 and Property Division: If one or both spouses file for Chapter 7 bankruptcy, the bankruptcy trustee will take control of any non-exempt assets and liquidate them to pay creditors. This can complicate property division, as the divorce court may need to wait for the bankruptcy court to release the assets before they can be divided. Community property is considered part of the bankruptcy estate, so both spouses may be impacted, even if only one spouse files for bankruptcy.
- Chapter 13 and Property Division: In Chapter 13, property is generally not liquidated, but the repayment plan may affect how assets and debts are divided in the divorce. The spouse who is going through Chapter 13 will still need to adhere to the payment plan, and the divorce court will take this into consideration when dividing assets and determining support payments.
How Bankruptcy Affects Child and Spousal Support
Bankruptcy does not discharge certain financial obligations, including child support and spousal support (alimony). In California, these obligations are considered priority debts, meaning they cannot be eliminated through bankruptcy, whether you file for Chapter 7 or Chapter 13.
In fact, if you owe past-due child or spousal support, bankruptcy will not stop collection efforts or wage garnishment for these debts. Additionally, if you are in a Chapter 13 repayment plan, you will still need to continue paying child or spousal support, along with your other debts, as outlined in the plan.
Should You File for Bankruptcy Before or After Divorce?
The decision to file for bankruptcy before or after divorce depends on several factors, including the amount of debt, the types of debts, and the nature of your assets. Here are a few points to consider when making this decision:
- Joint Debts: If you and your spouse have significant joint debts, filing for bankruptcy together before divorce can be more efficient and cost-effective. This allows both spouses to discharge their debts at once, simplifying the divorce process.
- Individual Debts: If one spouse has significantly more debt than the other, it may make sense for that spouse to file for bankruptcy individually after the divorce. This allows the other spouse to avoid the bankruptcy process entirely.
- Support Obligations: Since bankruptcy does not discharge child support or spousal support obligations, it may be beneficial to complete your divorce before filing for bankruptcy, so these obligations can be clearly outlined.
How Irwin & Irwin Can Help
Whether you are considering filing for bankruptcy before or after your divorce, we can help you understand how your decisions may impact property division, support payments, and your overall financial future. If you have questions about how bankruptcy may affect your divorce, contact our office to schedule a consultation. We are here to provide the guidance and support you need to navigate these challenging times.
