Filing a Joint Bankruptcy Prior to Divorce: Why it Makes Sense for Many Couples

Financial problems and marital strife often go hand-in-hand, so it is no surprise that many divorces may be a result of financial distress.  However, the financial distress may linger long after the divorce, and prevent closure for the former married couple as they independently struggle on reduced income and increased expenses.  While it may seem an odd strategy at first glance, it may make sense for a married couple with debt issues to consider the filing of a bankruptcy before the divorce, so that the issues to be addressed in the divorce can be reduced.  This assumes that the couple has no other adverse interests which would prevent a conflict of interest for a bankruptcy attorney, and that they actually need bankruptcy relief.

The primary issues to be addressed in any divorce are going to be child custody (if applicable) and property division.  Of lesser priority in a divorce is the division of debt, which can be very complicated if both parties have joint debts which will be divided between them.  For instance, the husband may agree, or be ordered, to pay a joint credit card.  However, the added expense of child support may render him unable to make timely payments on the credit card.  As a result, the wife’s credit may be affected, and she may face collection activity from the creditor.  Unfortunately, the assignment of responsibility for payment of the debt is not binding on the credit card company, as they may see fit to collect from whichever party that they choose.  The only recourse for the wife in this instance would be to file a motion in family court requiring the husband to pay the debt.  However, if he is simply unable, but not unwilling, to pay the debt, there is little relief that the family court can provide.

Another scenario involves the retention of the marital home, especially if it is underwater.  The wife may receive the marital home with the understanding that it will be refinanced or sold.  However, the house cannot be sold as it is worth less than what is owed, and the lender is unwilling to refinance the house based on just the wife’s income alone.  While the wife may wish to surrender the property, it would have an adverse effect on the husband’s credit.  As indicated above, the family court is limited in the relief that it can provide.

In both of these situations, a Chapter 7 bankruptcy may provide a meaningful financial tool.  It would eliminate the credit card debt and/or protect the couple from any post-foreclosure collection activity on the former residence.  In this manner, the parties exit the divorce unencumbered by their marital debts, which better enables them to maintain their post-divorce financial obligations such as the payment of child support or alimony.  It also eliminates futile post-divorce litigation over the non-payment of marital debts.  Too often I talk to individuals who cannot put their divorce behind them because they are still tethered to their ex-spouses on a joint debt which is in default, and they become the recipient of the credit consequences and collection activity.

A joint bankruptcy filing, if the couple is eligible and unable to pay the debts independently, can certainly reduce the time and expense of a divorce.  It can also reduce post-divorce matters, which again saves time and money.  A couple must be realistic about their finances going forward, and the value of their assets, in order to benefit.  If you believe that divorce debt division and the ability to pay it will be an ongoing and unreasonable burden, talk to your divorce attorney about a Chapter 7 bankruptcy.