In his latest series, “Debt Reset,” KingSpry’s Bankruptcy Law Attorney, Eric J. Filer, Esq., discusses the interesting relationship between bankruptcy and divorce and outlines the basic considerations for individuals contemplating these legal matters while seeking the best possible future.
1. Cost Savings
Under federal bankruptcy law, married couples can file for bankruptcy individually (via individual petitions) or jointly (via a joint petition). To determine whether to file individually or jointly, couples should consider the potential cost benefits of filing together. When spouses file jointly, they often get the same relief they would have if they filed individually. The strategic benefit is that they get a “two for one” discount. Court fees do not differentiate between single and joint petitions, and attorneys who charge a flat rate generally do not distinguish between single and joint petitions.
2. Asset Protection
Just because couples can file jointly does not mean they always should. Individuals must consider how they will protect their assets.
Don’t Liquidate Accounts Prematurely. Many debtors mistakenly drain their retirement accounts before going to a bankruptcy attorney for help. This is often unnecessary, because retirement accounts are protected under federal exemptions. Meaning, debtors may be able to retain these assets even after their bankruptcy case ends.
Greater Exemption Amounts for Couples. One benefit of filing jointly is that the federal exemption amounts apply separately to each spouse. This offers greater asset protection, because couples can protect twice the value of the same exemptible property than a individual filer could. Take, for example, a debtor’s residence. A single filer could protect up to $31,575.00 in their home’s equity, whereas a married couple could protect up to $63,150.00 in their home.
When Individually Filing is Better. However, it may be best if only one spouse files individually if most of the debt is in their name and the couple’s assets are jointly owned. In this case, the Pennsylvania exemptions would allow the filing spouse to free themselves of the debt, while protecting the joint assets.
Waiting Until Divorce is Final. In some instances, it may be better for couples to file after their divorce is finalized. A debtor’s eligibility to file for Chapter 7 bankruptcy is based on the “means test,” which is determined by family size and household income. The household income is based on both spouses’ income, regardless of whether an individual or joint petition was filed. Consequently, dual-income households where both spouses earn a decent living can result in the debtor not qualifying for Chapter 7 relief. This could push the debtor into Chapter 13 bankruptcy, a longer and costlier process.
3. Equitable Distribution
Another factor individuals should consider is equitable distribution, the process through which the couple’s property and liabilities are distributed. If a couple files a joint petition before divorcing, then that debt is one less point of contention. However, bankruptcy does not discharge an individual’s obligations under a property settlement agreement (“PSA”). As a result, bankruptcy cannot be used to avoid paying your ex-spouse monies owed under a PSA.
4. Timing
How Soon Can the Bankruptcy Process Get Started? The time it takes to file a petition usually depends on how quickly a client can get their financial documents to their attorney. The bankruptcy rules allow petitions to be filed without the required schedules and supporting documents, but this missing information must be supplemented quickly. Thus, filing without all of the necessary information is not the ideal approach. In fact, the information required for preparing the petition and schedules is generally the exact information an attorney needs to properly advise their clients.
How Long Does the Bankruptcy Process Take? Well, it depends. The process may vary based on whether the debtor filed for Chapter 7 or 13. A normal Chapter 7 bankruptcy can be completed in as little as six months. In contrast, a Chapter 13 bankruptcy requires the debtor to make payments over the course of a bankruptcy plan. This could take up to five years to complete.
5. Achieving a Fresh Start
Bankruptcy and divorce alike, the filer wants a fresh start. To achieve this goal, we recommend seeking legal advice as early as possible. Working with an experienced legal team can reduce the risk of losing assets while protecting an individual’s wealth.
Together, KingSpry’s Bankruptcy Law and Family Law Practice Groups are prepared to assist with your bankruptcy and family law matters.
This article is a publication of KingSpry’s Bankruptcy Law Practice Group. This article is meant to be informational and does not constitute legal advice.
