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Bankruptcy or Divorce?

Which should I file first?

Over a decade of experience practicing law and listening to numerous stories from clients over the years, I’ve realized that more often failing marriages and financial trouble go hand in hand.

Of course, marital problems are not always the reasons people seek bankruptcy relief. Many file for bankruptcy for different reasons. Reasons that are often more complex than just being able to make ends meet. A lost job, illness, injury or catastrophic events no one could have foreseen, often lead to exploration of financial relief.

In exploring options of divorce most people are quick to consult a competent divorce attorney. Never stopping to think about the consequences a divorce may have on their debt obligations. Bankruptcy cases involving a recent or pending divorce must be analyzed thoroughly by a bankruptcy attorney. Issues that arise in bankruptcy are like none other and are many times unclear or overlooked when attempting to obtain a divorce.

While impossible to cover each issue one must consider in divorce and bankruptcy, I will describe 3 common issues I encounter most often.

Divorce is a very emotional, upsetting and challenging event.

That said, those involved in divorce proceedings must ask questions. Then ask more. Emotions often cloud your judgment and cause you to react differently or dismiss important consequences you would not otherwise overlook. Common expression of clients, “I just wanted it over with” or “I just didn’t think he/she would do that.”

  1. Which do I file first? Bankruptcy or Divorce? It depends.

Experience has proven that if division of debts and neither party can sustain debt long term, then bankruptcy is the often the answer. Reducing costs (that neither party can afford) of litigating a divorce makes bankruptcy a great first solution for both parties.

  1. Will the party who agrees to pay the debt actually DO IT?

If a spouse agrees to take on the debt as part of the divorce and ultimately does not meet the obligation, it can damage the other party’s credit and create unintended consequences never considered when drafting the divorce agreement. 11 U.S.C. Section 523 (a) (15) Bankruptcy Code, sets forth an exception to discharge of a debt owed to a spouse or former spouse incurred during a divorce. This exception from discharge is only enforceable by the spouse. The creditor to whom the debt is owed cannot collect from the bankrupt spouse.

A common scenario: The wife agrees to pay a joint credit card debt per a divorce decree and holds the husband harmless. The wife then files bankruptcy. The credit card creditor then attempts to collect from the husband on the joint debt the wife was decreed to pay as part of the divorce. Because of the creditor’s collections, the husband incurs actual damages (i.e. garnished wages). Now the husband has a right to file action in the court where the divorce was finalized seeking damages, court costs, and attorney’s fees. However, the practical application of seeking damages is often unfruitful when one party of the divorce is bankrupt. While the husband is filing motions, and seeking relief from the wife’s contempt, his credit score takes a nose dive and wages are possibly being garnished. Creating a lot of chaos and frustration in his post-divorce life.

  1. Am I just looking for a quick fix or have I really thought this through?

Ask questions. Then ask more questions. Remember emotions cloud judgement, cause adverse reactions, and cause you to overlook important consequences. A “quick” divorce or “not thinking he/she” would do that will keep you from incurring detrimental consequences.

In my practice, I’ve encountered many unique and unusual situations from parties seeking financial advice after a divorce. It is impossible to cover every possible scenario here. If financial stress and debt are issues in your divorce, I hope you now understand the importance of seeking counsel from a bankruptcy attorney prior to filing. The initial bankruptcy consultation is offered at no charge.  Call me if you have questions about your bankruptcy options.   It is a decision that may determine your level of success after divorce.

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