Bankruptcy and Divorce: Which Should Come First?

Marital problems and financial difficulties often go hand-in-hand. It’s not uncommon for couples to be considering both bankruptcy and divorce at the same time. That raises the question of which process to go through first. While there is no universal answer applicable to every situation, considering legal, financial, and personal implications can help determine the best order for your unique circumstances.

Here are some pros and cons of filing for bankruptcy before or after divorce:

Bankruptcy before divorce

Filing for bankruptcy before divorce can simplify the division of debts and assets. Bankruptcy, particularly Chapter 7, can discharge unsecured debts such as credit cards and medical bills, allowing both spouses to begin divorce proceedings with a cleaner financial slate. This process can make property and debt division during divorce more straightforward, eliminating much of the financial entanglement that often complicates settlements.

A joint bankruptcy filing may also cost less than two separate filings, as both spouses share attorney costs and court fees. Additionally, if both parties file together before finalizing the divorce, they need only attend one creditors’ meeting and fill out one set of forms.

However, joint bankruptcy may not be ideal if significant conflicts exist, as both parties must cooperate during the process. Furthermore, if only one spouse qualifies for bankruptcy or if one party is significantly worse off financially, a joint filing may not be viable or beneficial. Assets held jointly may also be subject to liquidation in bankruptcy, which could affect property division during the divorce.

Divorce before bankruptcy

Divorcing before filing for bankruptcy may be appropriate if the couple’s combined income is too high to qualify for Chapter 7 bankruptcy but each would qualify individually post-divorce. Divorce can clarify ownership of assets and liabilities, making it easier for each ex-spouse to file bankruptcy on their own terms rather than jointly.

Additionally, if one spouse is primarily responsible for the debt or wishes to file for bankruptcy without affecting the other, divorcing first may offer more flexibility. Divorce settlements often specify who will keep certain debts, which, in turn, allows each person to manage them independently in bankruptcy.

On the downside, debts assigned during divorce, such as joint credit card debt, may be discharged in bankruptcy for the spouse who files, leaving the other spouse liable to creditors. Moreover, legal fees and the emotional challenges of separate proceedings may increase overall costs and stress.

Here are some factors couples should consider in deciding which path to take:

• Type and amount of debt — If discharging most debts together will reduce complications, bankruptcy first may make sense.

• Future financial stability — If one spouse plans to remarry quickly or expects a significant change in income, this may affect bankruptcy eligibility and timing.

• State law variations — Community property versus equitable distribution states can influence the best sequence.

• Cooperation level — Joint bankruptcy requires some level of collaboration; high-conflict divorces may make this difficult.

Ultimately, the right choice depends on your specific financial situation, the types of debt involved and your ability to work together through bankruptcy. Consulting with a bankruptcy attorney can help you evaluate which path best protects your interests. With careful planning, you can minimize financial fallout and prepare for a more stable post-divorce future.

At Marlin Branstetter Attorney at Law in Anaheim, I deliver effective legal support to Californians living with unmanageable debt and considering bankruptcy. Call me at 714-276-8589 or contact me online to schedule a free initial consultation.