In our prior installment in the Divorce and Bankruptcy series we covered some different scenarios that can arise during the divorce process that may make the bankruptcy discharge less effective. In this addition we will examine some planning tools that can be utilized before the divorce is initiated that can save both parties lots of time and money and can help maximize the bankruptcy discharge.
As we’ve already discussed, the bankruptcy/divorce combination is the most effective when both parties file a bankruptcy prior to filing for a divorce. This timing helps reduce potential issues with property settlements down the road and allows for the parties to save on attorney’s fees by only using one attorney for one case. Additionally, the parties can enter the divorce with no debt and an agreement on property division, therefore eliminating often contentious issues in a divorce.
Once both parties are working towards the common goal of eliminating debt, the planning and preparation aspect of bankruptcy becomes easier to manage. Below are five steps that can help make the bankruptcy and divorce strategy a much easier process.
Step 1: Establish some ground rules (and take a deep breath!)
Set ground rules for the discussion. Bankruptcy and divorce are stressful events for most people, and the same things that led to the divorce decision can result in difficult joint decision making. Draw up a short list of your goals for both processes. Make the talks more of strategy/planning session and less of a confrontational airing of marital baggage. Working together is going to save you money, and stress. And remember, bankruptcy is a pro-active planning tool, not a last result. So take a breath and relax, it is not as bad as you think it is.
Step 2: Figure out what (and who) you owe.
Pull credit reports (free at Annual Credit Reports.com) and review them with each other to establish who is obligated on what debt (remember joint debts are different than individual debts). Make sure to include medical bills as they often are not included on credit reports. This process will allow both of you to know exactly how much you owe individually and as a couple, and reduces the “surprise” factor that can pop up down the road in the middle of the divorce. This “debt audit” will also allow you to address how some debts that won’t be discharged, such as student loans, should be handled in the divorce.
Step 3: Decide who is going to get what property and what debts.
Apart from dividing debt, the division of assets in a divorce is another contentious issue that can be proactively dealt with. The first thing to keep in mind is that the “big” pieces of property, such as cars and homes, will usually have car loans or mortgages attached to them. If you have a vehicle loan that both parties feel can no longer be maintained once joint incomes are separated, that vehicle can be surrendered in the bankruptcy and the debt associated with that vehicle discharged. The same is true of a home and the mortgages attached to the home. Surrendering a home in a bankruptcy prior to the divorce will allow both parties to offload what is typically the largest marital liability.
If you decide to keep the property, establishing who will pay the loan is crucial. In many cases, we see clients who have been made responsible for a vehicle debt (and have possession of the vehicle), but the loan is in the ex-spouse’s name. Post-divorce our clients often have a hard time maintaining their financial obligations and often let loans, especially loans they aren’t ultimately liable for, go into default. If such a loan does go into default it is the ex-spouse’s credit that is affected, not our clients. Often this can be avoided if the spouses have a serious conversation about each other’s’ financial ability to maintain the loan once incomes are separated.
Step 4: Make an appointment with a bankruptcy attorney (and then show up to the appointment).
This seems counter-intuitive. You want a divorce right? Don’t you want to talk to a divorce attorney first? Usually, but in your case you’ve decided to file a bankruptcy. And, as we’ve discussed above, obtaining the discharge prior to filing the divorce is strategically the best move. The attorney helping you with your bankruptcy case can help you decide whether a Chapter 7 or a Chapter 13 is the best route and help you maximize the benefit of your property exemptions and discharge. A bankruptcy attorney can also advise you regarding debts that are typically not dischargeable, such as some tax debts and student loans, and provide you with strategies for dealing with them post-bankruptcy. Additionally, a bankruptcy attorney can advise both of you at the same time, saving you thousands in attorneys fees. The divorce attorney? He or she will typically refuse to advise both parties, even if you both want the divorce.
Step 5: Make an appointment with a divorce attorney
If you have made it this far: you have a clear picture of your debt, a strategy for dealing with non-dischargeable debts and an idea of who is going to take what property, the divorce process itself will be fairly painless (assuming, of course, you don’t have child custody complications). Divorce is often about deciding which party gets what debt and what property. By eliminating most, if not all, of the debt prior to the divorce, and by establishing a preliminary plan for the remaining property, you have effectively eliminated the most contentious and cost-consuming aspects of a divorce. The right divorce attorney can help pull together the final pieces and move you through the divorce process efficiently. Depending on whether or not you have children, many divorces can be achieved without ever appearing in court.
The prospect of combining a bankruptcy with a divorce sounds like most people’s version of a personal hell. Debts, divorce, attorneys, courts: none of it sounds like a good way to spend the next couple of months. However, we firmly believe that finding the right professionals, and viewing the bankruptcy process as a pro-active financial tool, instead of a “last resort”, will put clients in the right frame of mind to work together to both maximize the benefit of their bankruptcy and minimize the stress and animosity that are so common in divorce proceedings. Remember: divorce is expensive when the couple doesn’t work together. Bankruptcy is expensive (and less effective) when divorcing couples don’t file together. You can do both, together, and will be financially and emotionally stronger as a result.
For more information and for a free consultation contact: Rogue Mountain Law | LLC, 719-445-1787