Should I file for bankruptcy before divorce, or divorce before a bankruptcy?

Should I file for bankruptcy before divorce, or divorce before a bankruptcy?

The timing of a bankruptcy case or a divorce case in Virginia can be critically important.  There are important factors to consider when contemplating the timing of a bankruptcy and divorce case filing.

One factor to consider is the possibility of obtaining joint relief in bankruptcy.  A husband and wife may file a joint bankruptcy while they are married and both may obtain a discharge of their joint debts.  The discharge of the couple’s joint debts can eliminate a potentially contentious issue that a husband and wife might litigate in a contested divorce case, or that could hold up or prevent the spouses from reaching accord in a separation agreement or property settlement agreement.  Filing a joint bankruptcy case before a divorce could save the married couple from spending thousands of dollars in attorney’s fees and court costs or mediation fees.  Upon granting of a final decree of divorce, the former spouses would no longer be eligible for filing a joint bankruptcy case, and either would have to file an individual bankruptcy case limited to discharging his or her liability alone on a joint debt.

Either spouse may decide to file a bankruptcy before a divorce in order to preserve an asset for his or her use, or for the use of his or her spouse, or for equitable distribution by a Virginia circuit court judge in a divorce proceeding.  If a Virginia foreclosure sale is imminent, either spouse may file a chapter 13 bankruptcy case to preserve the equity in real estate in their joint names, or to save the former marital residence for continued occupancy by one or both of the spouses.

A spouse may decide to file bankruptcy before a divorce in order to take advantage of the tenancy by the entirety available only to married couples in Virginia.  If the parties have no joint unsecured debt, the tenancy by the entirety will protect property from the claims of either spouse alone, and from administration by the chapter 7 bankruptcy trustee, as long as they remain married.  Upon divorce, the tenancy by the entirety converts to a tenancy in common, and claims or liens against either former spouse may attach to the property.  A property that might not have been administered by a chapter 7 trustee in a filing by either spouse before entry of a final decree of divorce may thus become subject to administration in a filing after the entry of the divorce decree and the conversion of the tenancy by the entirety.

The type of relief needed by either or both spouses may be critically important to the timing of a bankruptcy or divorce.  In some instances, a spouse may wish to discharge attorney’s fees not related to support incurred in a divorce, or a spouse may wish to discharge, in a chapter 13 case, a claim arising out of separation or divorce that is not a domestic support obligation.  That spouse may wish to fully conclude the divorce, allow the claims to come into existence, and determine his or her liabilities before filing bankruptcy.  A spouse contemplating bankruptcy may also want to consider timing with respect to the possibility of a statutory lien for attorney’s fees attaching upon final judgment and the conclusion of disputes concerning marital property.  A husband or wife might also wish to consider the possibility of whether a bankruptcy filing would protect that spouse from being held in civil, non-punitive, contempt of court by a Virginia state court judge for failing to abide by the terms of a family law court order.

With the introduction of means testing in October 2005, either spouse must also consider how and whether income received during the last six (6) months before filing might create a presumption of abuse in a chapter 7 case filing and affect timing of the filing of a case.  Often an estranged spouse, who has been unemployed for a period of time, might lose eligibility for chapter 7 relief after returning to full employment for a sufficient number of months.

The timing of a bankruptcy or divorce case rests on the complex interplay of a number of factors, including the non-exhaustive description of the preceding factors.  You should consult with your bankruptcy or divorce lawyer to discuss how these and other factors may affect the timing of your c

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