Bankruptcy And Divorce – Which One First?
There are a variety of reasons that couples decide to part ways, ranging from lack of communication, trust or intimacy to financial problems or infidelity. Recent statistics indicate that approximately 40 to 50 percent of couples who marry before the age of 50 end up divorcing. Maryland historically has an overall divorce rate that is slightly below the national average.
The dissolution of a marriage is extremely stressful and can even feel like a death. It is an event that involves a tremendous amount of change from custody of the children to keeping the house and/or car(s) and even to strained or altered relationships with extended family and friends. Separation and divorce often involves significant lifestyle changes, and sometimes ex-spouses or soon-to-be former spouses have trouble meeting their new financial obligations. The process of dividing shared property and shared debts, along with the legal fees associated with divorce and potential alimony and/or child support payment can be financially devastating.
Divorce is one of the most frequent reasons cited by people filing for personal bankruptcy, but it can also be a complicating factor in bankruptcy proceedings. If you are considering filing for bankruptcy but are also going through a divorce, you may be wondering whether the bankruptcy or the divorce should come first.
The timing of divorce versus bankruptcy depends on several factors such as overall debt and whether you are filing for Chapter 7 bankruptcy or Chapter 13 bankruptcy. Divorce during bankruptcy can become very complex from a legal standpoint. It is important to plan both bankruptcy and divorce carefully since each significantly affects the other. An experienced legal counsel can provide valuable guidance through this process.
Legal Fees And Court Costs
If an individual files for bankruptcy jointly with their spouse, the filing costs are charged as a single case. This can often apply to attorney fees as well. However, if two people get divorced and each later files for bankruptcy individually, then each person will have to pay filing and attorney fees separately.
Chapter 7 Bankruptcy And Divorce
In a Chapter 7 bankruptcy, nonexempt assets are sold to pay off any unsecured debts, and the process typically takes a few months to complete. In some cases, people opt for Chapter 7 bankruptcy before divorce since Chapter 7 is a relatively quick process.
Qualifying for Chapter 7 bankruptcy depends largely on income. If a couple files jointly their combined income is calculated to determine eligibility. The calculations are done through the means test. If the means test determines that the combined income is too high, then each spouse can investigate filing for bankruptcy as an individual after the divorce in order to qualify for Chapter 7.
Chapter 13 Bankruptcy And Divorce
A Chapter 13 bankruptcy involves making payments towards outstanding debt over the course of 3 to 5 years. Due to the length of time involved, some people prefer to file for Chapter 13 bankruptcy after divorce.
Marital Settlement Agreements
When a marriage is dissolved, most couples enter into a marital settlement agreement that divides assets, assigns and divides up debts and in some cases requires that one spouse make payments to the other in the form of child support or alimony. A divorce agreement includes details about items such as: selling property and sharing the proceeds, transferring a vehicle title to the other spouse, assigning alimony payments, dividing the payment of credit card debts, requiring a new insurance policy for the other spouse and dependent children, assigning retirement funds to be divided at a future date and more. Whether or not portions of the marriage settlement agreement are dischargeable depends on a number of factors.
According to the Maryland Marital Property Act, all assets that spouses acquire during their marriage are considered marital property or assets. These will be the items that are divided during the divorce proceedings. During the dissolution of marriage, most couples enter into a marital settlement agreement that divides these assets, as well as assigns and divides up debts. In some cases, the courts require that one spouse make payments to the other in the form of child support or alimony.
Domestic Support Payments
It’s important to note that if you file for bankruptcy after a divorce, federal law protects domestic support payments for any bankruptcy. Items such as child support, alimony or any maintenance payments owed to a former spouse or child are considered to be domestic support obligations (DSOs).
DSOs are not dischargeable if they are included in any marital or divorce agreement, property settlement, court order, separation agreement or order from another governmental entity and are not assigned to any entity except to collect the debt. In addition, any future child or spousal support are also protected from being discharged during a bankruptcy proceeding.
Property Division Agreements
Property division agreements during divorce can be very complex as they may or may not be dischargeable during a bankruptcy. Since it can be difficult to determine whether or not property agreements are dischargeable, bankruptcy litigation often arises in order to determine if the property division agreements can be wiped away. Divorcing couples may be asked to divide property that they own together, such as a vacation condo or a beach house. In such a case, the property would be sold and the profits split immediately. Alternately, one spouse may choose to make payments to the other spouse over a period of time. If the property division agreement makes clear that the payments are for a property and are not Domestic Support Payments, then the debt may be dischargeable in a Chapter 13 bankruptcy.
When an individual files for personal bankruptcy in Maryland, the state law determines how much of their property is exempt. Currently, the Maryland homestead exemption is $23,675. This amount is subject to change, so it is wise to consult with an experienced attorney. Some states allow an individual to double the homestead exemption when filing jointly with their spouse, but in Maryland this is not allowed. In this case, it may be advantageous to file for bankruptcy individually following the divorce so that each spouse can take the full homestead exemption. If a couple files for bankruptcy while their divorce is in process, an automatic stay will stop any divorce related property division from occurring until the bankruptcy is settled.
Contested vs. Uncontested Divorce
If a couple cannot reach an agreement about the division of assets, the divorce is considered to be contested. In such a case, a judge will step in to determine how to resolve any open issues. The advantage of a divorce going to court is that full financial discovery will be required, making it more difficult for one spouse to hide assets that they do not wish to share. An uncontested divorce is one in which both spouses agree to the Marital Separation Agreement. A collaborative divorce is one in which each spouse and their respective attorney meets to negotiate the terms of the divorce outside of the court.
After divorce, an individual may be held liable for certain unpaid debts even if the court ordered their ex-spouse to pay those debts. For this reason, it is often preferable to allocate and pay off debts through bankruptcy before filing for divorce.
Attorneys Experienced in Both Bankruptcy Law and Divorce Law
Divorce rates have actually decreased since 2009, according to the U.S. Census Bureau, but the United States still has the sixth highest divorce rate in the world. The optimal timing for bankruptcy and divorce can be complicated since it depends on many factors. Deciding to file for bankruptcy following or during an emotionally fraught divorce can be extremely stressful. An experienced attorney can help you fully evaluate all of your options and make the most advantageous decision. At Sirody & Associates, our attorneys have deep knowledge of Maryland bankruptcy law. Contact us today for a complimentary consultation – we can help you make a fresh start.