Should I file for bankruptcy before or after my divorce? This is a complicated question that we often get from clients. It's a complex question and the answer will differ based on your unique situation. Income, joint property ownership, amount of debt, and the type of bankruptcy (chapter 7, 11, or 13) you wish to file are all factors that play a role in the answer. Filing before divorce is typically the route taken by the vast majority. Generally speaking though, there are a few points to consider when weighing your options.
1. Chapter 7 bankruptcies can be completed and discharged within a few months while a Chapter 13 requires a repayment plan that will last for 3-5 years. If a couple files Chapter 13 and then ends up filing for divorce before full repayment of debts, they may be prohibited from dividing property and will have to continue with their plan payments. Many couples in this situation will often choose to convert their chapter 13 to a chapter 7 or terminate the plan altogether. Therefore, if a divorce is imminent or in progress, filing Chapter 13 is generally discouraged.
2. The amount of property you and your spouse own jointly and your debt levels will also play a factor. If you and your spouse own your home jointly (as tenants by the entirety) and you both have a lot of joint and individual debt, it probably makes sense to file jointly for a chapter 7 liquidation of all assets before divorce. This will help simplify property division/distribution of debts when it come to the marital settlement agreement as there will be no debts to distribute.
3. If you file bankruptcy before divorce, the divorce may take longer to finalize because the automatic stay will freeze your assets until they can be liquidated or dealt with by the trustee.
4. Your household size determines your eligibility for Chapter 7. Every state has a means test based on income and household size. The means test determines the maximum income you are allowed to make in order to declare bankruptcy. In Maryland, the 2015 maximum income for a household of one is $59,475. The maximum income for a household of two is $76,489. If you are married with no children then your household size is two. If you wait until after divorce, you may not be able to qualify based on your individual income if it is too high. For example, if you are the sole earner for your household but after divorce your household size drops to one but you are still making the same amount of money then you may not qualify. Likewise, if you are a four person household (with two children) but after divorce your children will live with your ex-spouse then your household size will drop to one and that can change your qualification status. If you do not qualify for a chapter 7 jointly based on higher income, then you will have to wait until after divorce to see if you can file individually.
5. Most Maryland exemptions, such as the Wild Card and personal property exemptions, can be doubled for married couples filing jointly. The Maryland Homestead exemption of $22,975 cannot currently be doubled for married couples.
6. If you file jointly as a couple, you pay one attorney fee and one court filing fee.
7. If filing jointly as opposed to individually, there will be no joint debt that the non-filing spouse could be held responsible for.