Should You File Bankruptcy Before Or After Your Divorce?

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Getting a divorce can be financially draining in any situation, but if you are also in a lot of debt and considering bankruptcy, it can be especially hard. First, you need to decide if you want to declare bankruptcy before or after your divorce. The answer varies depending on your situation.

To guide yourself to the right decision, take a look at these questions:

1. Are you in a hurry to split up your assets and complete your divorce?

If you opt to declare bankruptcy before your divorce, it means you don't have to worry about filing when you are on your own and adjusting to your new financial life as a single person. However, filing bankruptcy before you file for divorce delays the divorce process.

If you have a shared home, a business, savings accounts, vehicles and other assets, you won't be able to split those items up and move forward with your divorce. Instead, you will need to leave all of your assets in place until you have completed your bankruptcy. If you are in a hurry to separate yourself from your ex-partner for any reason, you may want to get divorced first.

2. Do you have debts in your name you cannot afford to pay?

If most of the debts are in your name, you should focus on clearing them as quickly as possible by declaring bankruptcy before your divorce. That allows you to focus on repairing your credit as soon as possible.

In particular, you do not want to keep those debts and end up with a divorce decree that tells your ex-partner to pay them – that has the potential to hurt you financially in the long run. For example, if you have a credit card in your name but your ex-partner has more income than you, he or she may agree to pay the card for you as part of the divorce agreement.

However, the debt is still in your name. If your ex-partner stops paying it, you may become financially liable for it, your credit score may get hurt and debt collectors may harass you.

If you have lots of debt in your name you cannot afford to pay, do not let your ex-partner take it. If your ex-partner is going to assume responsibility for your debts, he or she should take out a consolidation loan in his or her name and pay off the debts in your name. If he or she cannot get a consolidation loan, declare bankruptcy before your divorce and clear your debts (and your name) officially, rather than relying on the other partner to pay it.

3. Is most of the debt in your ex-partner's name?

If most of the debt is in your ex-partner's name, you may want to try to secure a divorce agreement where he or she gets to keep all of his or her own debts. Unfortunately, if you declare bankruptcy together before your divorce, you may receive a form 1099 for the amount of debt that was discharged to the two of you together.

In many cases, you have to pay income taxes on the forgiven debt, as if it were income. To make sure you avoid this, let your partner keep his or her debts and deal with them in bankruptcy court after the divorce.

4. Do you earn more money than your ex-partner?

If you earn more money than your ex-partner, that could hurt you if you file bankruptcy after the divorce. If you file together before the divorce, the court takes into account both of your incomes, and as a couple, you also get more money exempted from debt repayment.

If you wait until after the divorce, your higher income may prevent you from declaring bankruptcy, and it may not allow you to file the type of bankruptcy you want.

For example, if you qualify for a Chapter 7 Bankruptcy, you don't have to pay anything back, but if you make too much money, you will be required to file a Chapter 13 bankruptcy which requires you to make repayments to your debtors for three to five years after the bankruptcy is filed.

Deciding whether you should declare bankruptcy before or after a divorce can be difficult. Consider consulting with a bankruptcy attorney, like John G Rhyne Attorney At Law, or a financial planner to ensure you are making the best choice for your situation.