Are there any issues with getting divorced before filing bankruptcy?

by Christopher Ariano, a divorce lawyer in Phoenix and Tucson

A bankruptcy can affect both you and your spouse. A petition to file bankruptcy is viewed as a fresh start for many people because you can either discharge your debt or create a modified court-approve repayment plan to pay back your creditors. Divorce may be the very reason that you or your former spouse are filing for bankruptcy in the first place because your finances may be whittling down.

Do I need to get a divorce to avoid declaring bankruptcy with my spouse?

No. You do have the choice to file jointly or separately, but the decision is an important one. Specifically, if you file jointly then your spouse’s property will also become part of the bankruptcy estate and both of your debts will be discharged.1 Joint filing makes sense in a community property state such as Arizona because most of your debts were probably incurred jointly during your marriage and you may have double the exemptions.2 If you have mostly marital property then it would be wise to file the bankruptcy jointly so the marital debt can be discharged. Filing one bankruptcy also leads to a lower overall cost since filing two bankruptcies means double the fees unless you plan to hire an attorney.

However, it is probably better to file separately if you and your spouse have significant separate property. Likewise, there are specific bankruptcy rules that do not allow a debtor to petition for bankruptcy under a specific chapter of the bankruptcy code if the debtor has filed for bankruptcy under that chapter within the past six or eight years.3 If those rules apply to you or your spouse, you may have to file separately.

A lot depends on what type of bankruptcy you declare as well. In a Chapter 7 bankruptcy you give up property but the process is quick, taking only a few months.4 You also need to qualify for a Chapter 7 bankruptcy by passing the “means test.”5 Under this test your income should not be higher than a threshold amount for your family. For example, if you are a family of two the threshold amount is $55,118.6  A Chapter 13 bankruptcy can last a lot longer, typically three to five years, and you keep your property while paying off your debts over that period.

Can I still collect child support or alimony after my former spouse declares bankruptcy?

Yes. Family support obligations are not dischargeable under Chapter 7 or Chapter 13 of the bankruptcy code. Your former spouse will have to pay these obligations no matter what chapter they file under.

Can I sell off some of my marital property before declaring bankruptcy jointly?

Usually no. Selling off or transferring assets before declaring bankruptcy can be a serious offense if you do so to hide your assets. If you sell nonexempt property just to hide assets the bankruptcy trustee may be permitted to recover that property and add it to your bankruptcy estate.7 If you sell exempt property before bankruptcy then that is fine as long as you receive fair value for the property.8 If you do not receive fair value then it may look like you are trying to defraud creditors.9 The bankruptcy court may even look back at suspicious transfers after your bankruptcy depending on the type of property and the reason you are being investigated.10

If you are considering a divorce and considering filing for bankruptcy, it is best to contact an Arizona lawyer who can handle family law and bankruptcy issues. Your lawyer will be able to tell you which proceeding to go through with first and will help you evaluate your situation.  At Ariano & Reppucci our experienced and dedicated attorneys are available around the clock to answer your questions.

[1] Lisa Guerin, Bankruptcy for Married Couples: Filing Options, thebankruptcysite.org, http://www.thebankruptcysite.org/resources/bankruptcy/filing-bankruptcy/bankruptcy-married-couples-filing-options (last visited Dec. 2, 2014).

2 Id.

3 Id.

4 Kathleen Michon, Bankruptcy and Divorce: Which First?, thebankruptcysite.org, http://www.thebankruptcysite.org/resources/bankruptcy/bankruptcy-planning/bankruptcy-divorce-which-first (last visited Dec. 2, 2014).

5 Id.

6 How The Bankruptcy Means Test Works, jacksonwhitelaw.com, http://www.jacksonwhitelaw.com/arizona-bankruptcy/arizona-bankruptcy-means-test/ (last visited Dec. 4, 2014).

7 Patricia Dzikowski, Selling Nonexempt Property Before Filing For Bankruptcy, nolo.com, http://www.nolo.com/legal-encyclopedia/selling-nonexempt-property-before-filing-bankruptcy.html (last visited Dec. 3, 2014).

8 Id.

9 Id.

10 Id.