December 12, 2012

Divorce or Bankruptcy: Which to File First?

Generally, assuming the spouses can get along well enough to get through the bankruptcy process together, a divorcing couple should file a Chapter 7 bankruptcy first. (A Chapter 13 bankruptcy raises additional complications because it puts the couple on a joint payment plan for up to 5 years).
Here’s why: Assets are property that must be allocated between divorcing spouses. So, however, is debt. Because Washington is a community property state, almost all property- including debt – acquired during the marriage, is community property. bankruptcy_money_argue
In the current economy, many divorcing couples are more concerned about the division of their community debts than the division of their community assets. If the couple has substantial debt, it makes sense to file a joint bankruptcy before filing for divorce. This way, the debts are discharged in the bankruptcy before they are divided in the divorce. This simplifies the divorce process and avoids the situation in which one spouse agrees to pay a certain debt in the divorce, then files bankruptcy and has that debt discharged, leaving the other spouse on the hook for it.
Example: Just because the divorce decree says Spouse A will be responsible for the Bank of America credit card does not mean Bank of America cannot sue Spouse B for the debt.  If Spouse A files bankruptcy and the debt is discharged, Bank of America will probably go after Spouse B in spite of the divorce decree since the debt is a community debt. Spouse B’s only recourse will be to turn around and sue Spouse A for the amount of debt Bank of America recovered from him or her.
Additionally, if both spouses will ultimately need to file bankruptcy, they can avoid paying an extra filing fee if they file a joint bankruptcy before the divorce rather than two individual bankruptcies after the divorce.
To learn more about divorce and/or bankruptcy, contact a Kirkland bankruptcy or divorce lawyer.

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