Divorce and Bankruptcy

It’s no secret that money problems and disagreements over finances can create considerable consternation in a romantic relationship or marriage. While financial problems may not directly cause all divorces, the issue certainly plays a role in many failed relationships.  Financial problems are consistently touted as one of the most frequent causes of divorce in the United States. It’s not surprising then to learn that bankruptcy filings are frequently made by the participants in failed marriages. It is vital for both spouses to have a thorough understanding of how a potential bankruptcy filing can affect the divorce process and how proper planning is required to facilitate the best possible financial outcome for all parties involved. In most circumstances, it is advisable to file for bankruptcy prior to filing for divorce, if it is at all possible. The Men's Center for Domestic Resolution in Pleasant Hill, Missouri provides men with the expertise to survive divorce even in the midst of financial struggles.

Financial struggles and relationship struggles are strongly related and are not mutually exclusive by any means.  We all grow up differently, in different families with different values toward money, and this along with life experience shape the way we behave with regard to money and finances. Some of us are spenders, and have a laissez faire or carefree relationship toward money and savings. Others take a more frugal or conservative attitude toward money, and save whatever they can whenever it is possible. These differences illustrate why its very important to discuss these issues prior to marriage with a potential spouse to make sure both parties are on the same page regarding financial issues, or at least to make sure each person can tolerate and coexist with the other's attitude toward money. Unfortunately when someone is young and in love and it feels like nothing could penetrate those feelings, they are vulnerable to making regrettable decisions with regard to the choice of a spouse.

Unfortunately its not always an easy task to have a thorough understanding of your partner's or potential partner's financial attitude and financial position because people are not always honest about their finances, especially if it involves substantial debt. Dishonesty regarding finances in a relationship is so pervasive that a phrase has been developed to describe the phenomena. Financial infidelity occurs when one partner in a relationship is intentionally dishonest with the other regarding their personal financial habits, including income, spending and/or debt. In a survey by US News & World Report, 30% of participants acknowledged dishonesty in their relationship regarding topics such as secret purchases, hidden debts, and other issues such as income.

According to a survey by the Institute for Divorce Financial Analysts, the top 3 leading causes of divorce were incompatibility representing 43% of divorces, infidelity at 28% and “money issues” 22% of the time. Yet in a poll conducted by www.DivorceMagazine.com, financial issues were found to be the leading cause of divorce, followed closely by basic incompatibility. “Disparate goals and values around money coupled with the power and control financial prosperity represents makes money a common battle ground in marriages,” says Justin A. Reckers, a certified divorce financial analyst.

What is bankruptcy?  According the United States Courts website, “[b]ankruptcy helps people who can no longer pay their debts get a fresh start by liquidating assets to pay their debts or by creating a repayment plan. In the United States, there are 6 distinct types of bankruptcy actions: Chapter 7: Liquidation, Chapter 13: Repayment Plan, Chapter 11: Large Reorganization, Chapter 12: Family Farmers, Chapter 15: Used in Foreign Cases and Chapter 9: Municipalities. “Chapter” simply refers to the Chapter in the U.S. Bankruptcy Code.  Although bankruptcy is in some ways a new start, it’s important to understand that bankruptcy does not eliminate student loans, government debts (taxes, fines or penalties), reaffirmed debt (when you recommit to the terms of a current loan), child support or maintenance (aka alimony).  For the purposes of this writing the two relevant types of bankruptcy include Chapter 7, also known as liquidation or straight bankruptcy, and Chapter 13, which reorganizes debt.

Chapter 7 bankruptcy is the most common type of bankruptcy filing in the U.S. and it works by discharging debt via the liquidation of assets. Prior to the filing, any person who intends to file a Chapter 7 petition, must first attend an approved credit counseling course. To initiate a Chapter 7 bankruptcy, the moving party must pass a means test to determine the ability of the debtor to repay the creditors. If the debtor’s monthly income is less than the median income in the state of filing, then the means test is automatically passed.  While Chapter 7 involves selling off assets to pay debts, the government provides exemptions for certain types of property which is not liquidated.  These common exemptions vary from state to state, but generally include a home residence, a car, retirement accounts and assets that are needed for employment/income.  In most Chapter 7 cases, there are no assets left to sell after the exemptions are accounted for.  A Chapter 7 bankruptcy will stay on your credit report for 10 years.

In Chapter 13 Bankruptcy, the court will order a monthly repayment plan that will enable the debtor to repay a portion of their unsecured debt and all of their secured debt over a three-to-five-year time period.  This chapter of the bankruptcy is often used to stop foreclosure of a home, to make up failed automobile or mortgage payments, pay owed taxes, stop interest accumulation on local, state or federal tax debts and to avoid liquidating non-exempt property.  To qualify for Chapter 13 Bankruptcy, the debtor must have a regular source of income and if they are able to complete all of the payments in the court’s bankruptcy order, then all of their remaining unsecured debt is discharged forever.

In most situations it is advantageous for divorcing couples to file for bankruptcy first before filing for divorce.  First off, if married “divorcing” couples file bankruptcy together prior to filing for divorce, they will only have to pay one filing fee for the bankruptcy petition, and the spouses can share the legal fees.  When a spouse files bankruptcy first, much of the property division and debt division is taken care of before the divorce proceedings begin. Most importantly, in a divorce proceeding (filed prior to a bankruptcy), if a judge orders your ex-wife to pay a joint debt she shared with you, the creditor can still come after you if the debt is not paid … the creditor simply does not care about nor are they legally barred from collecting a debt by a divorce decree.

The Men’s Center for Domestic Resolution is a divorce and family law firm located in Pleasant Hill, Cass County, Missouri. Our mission is to help men through divorce and child custody issues empathetically and return them to life stronger and more resilient than they were previously when we found them.  For a consultation with attorney Robert Davis, you can reach our office at 816-287-1520 or schedule an appointment by communicating with us online. We represent men in Lee’s Summit, Blue Springs, Independence and all of Cass County, Missouri.