Bankruptcy or divorce: which comes first?
Before prioritizing bankruptcy or divorce, a couple should determine whether they want to file a Chapter 7 bankruptcy or a Chapter 13 bankruptcy. A Chapter 7 bankruptcy case lasts a few months and can wipe the slate clean quick and fast. A Chapter 13 bankruptcy lasts three to five years and involves regular payments to the creditors.
A couple that is not having an amicable split may want to file for Chapter 7 bankruptcy. They could complete the proceeding, get rid of their joint debts, and then file for divorce. A couple that can work well together may want to file for divorce first and then consider their options. They could then file individually for Chapter 13 bankruptcy or Chapter 7, whichever works for them best individually.
If the couple is filing for Chapter 7 bankruptcy first, they have the advantage of not having to pay two sets of filing fees and attorney’s fees since they are filing jointly. If their combined income is too great, they may not be eligible for Chapter 7 bankruptcy. If this is true, the couple could divorce first and file individually for Chapter 7 bankruptcy in order to qualify separately.
When a couple files for bankruptcy before divorce, the bankruptcy court may cancel joint marital debts. The family court would otherwise need to divide these debts in divorce proceedings. Each individual can then pay off their portion of the debt separately in bankruptcy.
In Alabama, a couple filing a joint bankruptcy in Birmingham can double their exemptions if they both have an interest in a piece of real property. Specifically, Alabama’s homestead exemption allows a property owner to protect up to $16,450 of the value of their home. Two spouses owning a property together can double the exemption, bringing the protection up to $32,900.
Start over with better credit
If a person will exit the divorce with an unstable financial future, they should consider filing for bankruptcy after the divorce. Filing for bankruptcy negatively impacts a person’s credit score. An individual who needs a good credit score to find their own residence or get a new job should consider postponing filing for bankruptcy until they have received the property divided in the divorce.
A bankruptcy can remain on a person’s credit score for seven to ten years. The proceeding can have a severe negative impact on a person who is trying to establish their independence. Once divorce proceedings are complete, an individual can consider alternatives to hiring a bankruptcy attorney. These may include debt consolidation, debt settlement, and a debt management plan. All of these options negatively affect a person’s credit score, but to a lesser extent than bankruptcy.
It is a good idea for a person considering divorce and bankruptcy to consult a local bankruptcy or divorce attorney in Huntsville or wherever they reside. The couple should also seek out an accountant solely for themselves at least once. This allows the person to understand what assets they will receive following the divorce. They will also learn how their credit score may be affected by bankruptcy and what they need to do to remain financially secure going forward. It is very important for a person to remain financially secure if the couple had children. Serious financial instability following a divorce could affect the couple’s child custody arrangement.
Devin O’Dell specializes in Bankruptcy and Probate & Estates Law. Mrs. O’Dell is licensed to practice in the State of Alabama and both the U.S. District Court of Northern and Middle Districts of Alabama. She regularly writes about bankruptcy and wills & trusts and enjoys speaking with clients about their estate planning needs.