Stresses related to unmanageable debt often result in a couple's divorce. A divorce can itself result in debt as the former spouses learn how to support two separate households, deal with their portion of marital debt and face other financial issues. It is a vicious cycle; one that traps countless couples each year. Initially, spouses may find themselves wondering whether they should get divorced and divide their debts, file for bankruptcy to relieve their financial stresses or both.
The financial impact of divorce is such a common issue, in fact, that there is now such a thing as "divorce insurance." Similar to other insurance policies - like life or auto insurance - these policies pay out if a couple divorces after a predetermined length of time. The policies are designed to provide funds to cover the costs of the divorce itself and minimize the financial impact of the dissolution. Regardless of whether a couple chooses to divide debt in a divorce, file for bankruptcy or both, it is vital that each spouse considers the practical ramifications of each option.
How is Marital Property Affected by a Divorce or Bankruptcy Filing?
Both divorce and bankruptcy can result in loss of property: Chapter 7 bankruptcy is commonly known as "liquidation bankruptcy" because it uses money from the sale of non-exempt assets to pay down as much debt as possible. Chapter 13 bankruptcy might not result in liquidation, but it does leave long-term debt that must be paid. Filing for divorce after a bankruptcy filing could leave one spouse saddled with a disproportionate amount of debt because the other spouse managed to have his or her debts forgiven.
Should a divorce be filed instead of a bankruptcy application, there is a specific stage in a divorce proceeding wherein couples must divvy up both their assets and their debts - the property division process. This is the time in which assets like home(s), investment funds, vehicles, business interests, pensions, etc. are inventoried, valued and then divided. The same process occurs when marital debts like mortgages, credit card debt and personal (non-student) loans are divided up between the parties.
Regardless of whether you are interested in filing for divorce or for bankruptcy protection, there are many factors to consider. An attorney experienced in navigating both of these legal processes can be an invaluable resource to provide you with information about your rights and options.
