It’s no secret that money troubles are one of the biggest sources of stress in a marriage. Whether it’s different approaches to saving and spending, a loss of income, or the pressure of mounting debt, couples may find themselves both struggling to manage their finances and keep their marriage afloat. Unfortunately, many couples find themselves contemplating both bankruptcy and divorce at the same time.
Even for those couples who make it through divorce without going into debt, it’s not necessarily smooth financial sailing ahead. Going through divorce is, itself, a leading cause of bankruptcy filings. It’s important to understand how bankruptcy can affect divorce in Ohio, and how best to navigate these legal processes at nearly the same time.
Bankruptcy and Divorce Timing
If you know you will be filing both a bankruptcy case and a divorce case, which should you file first? The answer depends on your situation. If you and your spouse have a lot of joint debt, it may make sense to file for bankruptcy prior to getting divorced. A Chapter 7 bankruptcy will wipe the slate clean of unsecured debt like credit card debt and medical bills. Without unsecured debt hanging over your head, it may be easier to reach a settlement regarding your remaining marital property and debt.
However, there are circumstances in which it makes more sense to file for bankruptcy after the divorce. If your joint incomes are too high to qualify for Chapter 7, you may want to file for bankruptcy individually after your divorce; it may be easier to qualify on a single income. You may also want to file for bankruptcy after your divorce if it is important to you to divorce quickly; the automatic stay can delay the divorce process. Filing a bankruptcy case puts an automatic hold on all state-level cases, which includes divorce. However, that stay can be lifted at any time for good reason, such as marital obligations or to end the marriage. Filing for bankruptcy after divorce also means that a non–filing spouse’s finances are completely separate.
Filing for bankruptcy in the middle of a divorce is not usually recommended, but may be necessary if the spouse filing is in urgent financial distress and cannot wait for relief or if the parties learn that nearly all debt is in one spouse’s name and resolving those debts before final divorce is most beneficial. However, because the divorce court cannot divide property until the bankruptcy is resolved, filing for bankruptcy during divorce will draw out the divorce process. A Motion for Relief from Stay must then be filed in order to proceed with a divorce matter while a bankruptcy case is pending.
In general, filing for bankruptcy before divorce is often best when the couple has a lot of joint debt, and filing for bankruptcy after divorce may be preferable for individual debt relief. The bottom line is that because everyone’s situation is different, you should talk to both a bankruptcy attorney and a divorce attorney before making a decision about the timing of your cases. Your divorce attorney can also advise you about protecting your credit score in divorce.
Risks for a Non-Filing Spouse
There are some financial risks to a non-filing spouse when their spouse files for bankruptcy (whether before or after divorce). One common danger is that the non-filing spouse will become fully responsible for joint debt the parties took on during the marriage. Let’s say that Bob and Anne have a joint credit card with a $20,000 balance. Anne files for bankruptcy before the divorce and her liability for this debt is discharged. Bob does not file for bankruptcy. The credit card company can still demand full payment from Bob.
Now let’s say that the same credit card debt exists, and Bob and Anne decide to file for divorce. Because Anne incurred nearly all of the charges on the credit card after the complaint for divorce was filed, they agree that she will be assigned responsibility for the $20,000 debt in the divorce, and that she will hold Bob harmless on the debt.
Shortly after the divorce, Anne realizes that she can’t make payments, and she decides to file for Chapter 7 bankruptcy. The credit card company comes after Bob for the entire amount of the debt. Can they do that? Yes, they can; Bob and Anne made an agreement that Anne would be responsible for that debt, but the credit card company was not party to their agreement. Bob’s recourse in this situation would be to go after Anne for reimbursement of any payments he had to make on the debt. Because both federal and state law are at play in this issue, it is essential to have a knowledgeable attorney on your side during the divorce process to help protect yourself from loss.
Please know there is a difference between a Chapter 7 Bankruptcy, which is a clean start, and a Chapter 13 Bankruptcy, which is a payment plan over time. If you are divorcing, and your spouse is filing for bankruptcy (or you suspect that they might), speak to your divorce attorney about how best to protect your interests.
Child Support, Spousal Support, and Other Divorce-Related Debts
Chapter 7 bankruptcy wipes out most debt, but not certain debts related to divorce. That includes:
- Child support obligations
- Spousal support (alimony) obligations
- Divorce property settlements
- Joint debt assigned in divorce (such as the scenario described above)
- Debts incurred through fraudulent activity or other misconduct against a spouse during the divorce.
Child support, spousal support, and debt due to fraud or misconduct are also not dischargeable in aChapter 13 bankruptcy, which allows individuals or couples with higher incomes to repay partial amounts of debts owed over time in what is known as a “Chapter 13 repayment plan.” Property settlements and joint debt assigned in divorce may be repaid over time in a Chapter 13 repayment plan, as well.
These big three survive bankruptcy of any kind — secured debts, statutory debts, and debts from fraud.
Secured: those debts guaranteed by items you want to keep once the bankruptcy is over (such as a car that can be repossessed if the note is not paid, or a house that can be foreclosed upon if the mortgage is not paid), and can be paid inside or outside of the bankruptcy plan;
Statutory: those debts that are created from the operation of law, which includes taxes and obligations for spousal support and child support; and
Fraud: this one is the big one that trustees look for, because, while it’s very difficult to prove, a fraud finding by a creditor or former spouse inside a bankruptcy proceeding can make a debt stick and survive bankruptcy.
Contact an Experienced Ohio Divorce and Family Law Attorney
If you are struggling with debt and are considering divorce, it’s essential to have a knowledgeable divorce attorney by your side who can advise you about how bankruptcy can affect divorce in Ohio.
Located in Green, Ohio – halfway between the Akron (Summit County) and Canton (Stark County) courthouses – the attorneys at Melissa Graham-Hurd & Associates, LLC provide dedicated counsel to clients for a wide array of family law matters, including those involving bankruptcy and divorce. To learn more about how bankruptcy can affect divorce, contact Melissa Graham-Hurd and Associates to schedule a consultation to learn how we can help.
