Adultery and financial problems are two leading causes of divorce, but for the purposes of this article, we’re going to focus on the latter and the issue of bankruptcy. As you can imagine, money problems often lead to divorce and ultimately bankruptcy. And because divorce and bankruptcy are often interconnected, we’re frequently asked, “Should I file bankruptcy or divorce first?” and “Does it matter?”
Yes, the timing definitely matters but there isn’t a “one-size-fits-all” approach to bankruptcy and divorce. Which comes first? Much of it depends on the types of debts that you and your spouse have and your income.
Comparing Chapter 7 to Chapter 13 Bankruptcy
The two main chapters filed by individual debtors are Chapter 7 and Chapter 13 bankruptcy. Chapter 7 is reserved for low-income debtors, whereas Chapter 13 is for debtors who earn too much money and can’t qualify for a Chapter 7.
With a Chapter 7, debtors are able to wipe out (discharge) unsecured debts, such as credit card debt, medical debt, personal loans, taxes of a certain age, cell phone bills, and utility bills. With a Chapter 13, the debtors enter into a 3 to 5-year repayment plan that eliminates all or a portion of their debt. Often, debtors pay unsecured creditors pennies on the dollar.
So, which is right for you? It depends on your disposable income and your debts. If you and your spouse qualify under a Chapter 7, it may make sense to file Chapter 7 before you file for divorce, this way you can wipe out a lot of marital debt and get a fresh start. If you don’t qualify because your combined income is too high, you may need to file individually after the divorce is final.
If you wish to file a Chapter 13, you may want to hold off until after the divorce because you probably don’t want to be locked into a payment plan with your ex for so long.
Related: Protecting Your Credit in a Divorce
We are only scratching the surface about timing bankruptcy with a divorce. If you are seriously considering filing for divorce and bankruptcy, we suggest you meet with our Denver divorce attorney before taking any steps that may be premature and lead to a less than desirable outcome.