Matrimonial bankruptcy occurs when financial difficulties intersect with divorce, creating a complex legal situation that affects both spouses. When one or both spouses face overwhelming debt during or after a divorce, filing for bankruptcy may be an option to alleviate financial burdens.
Divorce and bankruptcy are often linked, as the financial strain of dividing assets, paying spousal or child support, and maintaining separate households can push one or both spouses into financial distress. The timing of a bankruptcy filing can significantly affect the divorce process:
- Filing Before Divorce: If both spouses are struggling with debt, filing for joint bankruptcy before divorce may simplify financial matters by eliminating shared debt. This approach can make asset division easier since fewer debts remain to be assigned to each spouse.
- Filing After Divorce: If only one spouse is financially struggling post-divorce, they may choose to file bankruptcy individually.
It is worth noting that if a divorce decree assigns certain debts to one spouse, but they later file for bankruptcy, creditors may still pursue the other spouse for repayment if they co-signed on the debt.
Taking action
There are two primary types of bankruptcy individuals can file when facing financial hardship during or after divorce:
- Chapter 7 Bankruptcy: Chapter 7 is often a faster process but may require liquidating some assets to pay creditors. Only lower-income couples or individuals will qualify for this opportunity.
- Chapter 13 Bankruptcy: This form of bankruptcy restructures debt into a repayment plan lasting three to five years. It allows individuals to catch up on missed payments, such as mortgage or car loans, while keeping their assets. This may be beneficial for a divorced spouse who wishes to retain property while managing debt, not for couples who hope to file for bankruptcy quickly post-divorce so that they can disentangle their finances from each other’s.
Determining which type of bankruptcy to file, and when, can impact one or both spouses significantly during or post-divorce. Every case is unique and this area of law is notoriously complex. Therefore, seeking legal guidance before committing to a particular approach is generally wise.