Can I Declare Bankruptcy While in the Process of a Divorce?

Is It Possible to Declare Bankruptcy While Going Through a Divorce?

Financial concerns and divorce are each, on their own, considered to be among life’s most stressful situations. But when someone is going through a divorce and realizes they may have financial issues leading them to bankruptcy, that can create even more emotional turbulence. The short answer is that yes, you can file for bankruptcy while going through a divorce. It does complicate the proceedings. Our firm has attorneys who handle divorce and bankruptcy, so that we can work with you on both processes. Here’s what you need to know.

Does Filing for Bankruptcy During a Divorce Change the Divorce Proceedings?

It can in such a way that it might prolong the divorce proceedings, or the divorce could slow down the bankruptcy. Either way, that can cause both processes to take longer and cost more, which is why it’s usually a good idea to do one at a time. However, that’s not always feasible.

When one spouse files for bankruptcy during a divorce, the initial result is that the division of property and assets comes to a halt for a legal process known as a “stay.”

One critical aspect of how bankruptcy affects divorce proceedings is that it puts a stop to the division of property and assets in a legal maneuver called a “stay.” Anything considered marital property (which is often most property and assets) moves to the bankruptcy court, so the divorce court can’t finalize the division of assets until the bankruptcy court is done with them.

In turn, things like spousal support (also known as alimony) or child support can slow down bankruptcy proceedings. A bankruptcy complicates support payments in divorce court, which must be addressed before the bankruptcy can continue.

Does Filing for Bankruptcy Affect Child Custody Issues?

No. The bankruptcy court deals strictly with financial concerns around assets and debts. It has nothing to do with child custody, which the family law court solely handles. However, the bankruptcy court can potentially affect child support payments and amounts.

If One Spouse Declares Bankruptcy During a Divorce, Does That Mean the Other Spouse Has to Declare Bankruptcy Too?

No. As long as the bulk of the debt belongs to one spouse, that spouse can file for bankruptcy independently. That said, the spouse not declaring bankruptcy will have to provide various financial records to the court so community property and community debt can be dealt with in the bankruptcy and the divorce.

What Is the Means Test in Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is the type of bankruptcy that cancels all or most of the outstanding debt. But to be eligible for that, the person filing for it must pass something called a means test. This is a test to ensure someone doesn’t file bankruptcy when they can afford to pay their debts.

In California, there are two parts to the means test. The first part is the median income test. That determines if your household income falls below the California median household income for the County lived in. If you pass the median test, you can go forward with bankruptcy. If you don’t, you have to undergo a full means test. That’s a much deeper dive into your overall financials, looking not just at debt but monthly expenses such as car payments, food, mortgage, and utility bills. If the monthly living expenses exceed the monthly income, you’ll be allowed to move forward with bankruptcy.

Are Child Support or Alimony Affected by Bankruptcy?

Usually not. The bankruptcy court doesn’t handle child support or alimony payments, and creditors are legally not allowed to try and access those funds to pay other debts. Suppose the person filing for bankruptcy is the one who receives child support and/or alimony. In that case, the bankruptcy court will deduct those amounts from calculations of their disposable income so that the income won’t look larger than it is because of those payments.

Are There Any Other Reasons Not to File for Bankruptcy During a Divorce?

As noted above, declaring bankruptcy can slow the divorce proceedings, increasing stress and potentially leading to more acrimony. Suppose you cannot easily prove that you need to file for bankruptcy. In that case, your spouse’s legal team may question the timing and insinuate that you’re trying to avoid financial responsibility, which in turn will cause more hard feelings. Generally, it’s a good idea to wait until the divorce is settled to file for bankruptcy.

When Is the Best Time to File for Bankruptcy?

Usually, the best time is before divorce proceedings begin. It can make property division easier, especially debts; it can make the divorce itself less time-consuming and expensive; and it can potentially allow a married couple to take advantage of certain bankruptcy exemptions.

Filing for bankruptcy after the divorce is finalized can lead to further legal complications, especially if the debt involved is jointly owned. When joint debt is involved, and one spouse goes through bankruptcy, the creditor could sue the other spouse for the remaining balance.

As noted above, bankruptcy doesn’t remove monetary obligations like child support and alimony.

I’m Worried that I Need to File for Bankruptcy While Going Through My Divorce. What Should I Do?

Call us at 916-685-7878 for a free consultation. We have attorneys who handle divorce and bankruptcy cases, so we can walk you through the options for the best outcome for you. We’re both compassionate and aggressive, meaning we understand your situation and concerns and are ready to put our full weight behind your legal needs.