If you are facing both divorce and serious financial problems, you may be wondering which should come first: bankruptcy or divorce?

This is a question I hear from people who are dealing with two major life events at the same time. Unfortunately, there is no universal answer.

Sometimes it makes sense to file bankruptcy before the divorce. Sometimes it makes more sense to wait until after the divorce. And sometimes the best answer depends upon what happens with the marital home, joint debts, property, income and support obligations.

I have practiced consumer bankruptcy exclusively for more than 30 years, and I have seen many situations where the timing of the bankruptcy in relation to the divorce made a significant difference.

The important thing is to look at the bankruptcy and divorce together rather than treating them as completely unrelated matters.

Sometimes, Filing Bankruptcy Before the Divorce Makes Sense

Sometimes, filing bankruptcy before the divorce makes sense.

If you and your spouse are both struggling with substantial joint debts, filing bankruptcy while you are still married may allow you to deal with those debts before the divorce is finalized.

For example, suppose you and your spouse have:

• Joint credit cards
• Medical bills
• Personal loans
• Joint deficiency balances
• Other unsecured debts

If both spouses qualify for Chapter 7, there can be a significant advantage to filing one joint bankruptcy case rather than having each spouse file a separate case.

A husband and wife can generally file one joint Chapter 7 petition, which can eliminate a substantial amount of their unsecured debt and potentially simplify the financial side of the divorce.

There can also be practical advantages to determining which debts can be discharged before the parties divide their property and financial responsibilities in the divorce.

But There Is an Important Caveat to Filing a Joint Bankruptcy

Both spouses need to be fully on board with filing the joint bankruptcy—and they need to understand that the bankruptcy case and the divorce need to be considered together.

A joint bankruptcy is a single bankruptcy case involving both the husband and wife. The attorney representing them represents both spouses in that bankruptcy case.

That can become a significant problem if the couple files a joint bankruptcy and then decides to proceed with a divorce while the bankruptcy case is still pending.

Once the spouses are involved in a divorce, their financial interests can become adverse to one another. One spouse may have an interest in protecting certain property while the other spouse has a different interest. They may disagree about the value or division of assets, responsibility for particular debts, transfers of property, or other financial issues that arise during the divorce.

At that point, the bankruptcy attorney may have a conflict of interest in continuing to represent both spouses.

Depending upon the circumstances, the attorney may be required to seek permission from the Bankruptcy Court to withdraw from representing one or both spouses. This can create a significant problem for the couple because they may then need to obtain new bankruptcy counsel, potentially resulting in additional expense, delay and complications in the pending bankruptcy case.

For that reason, if you and your spouse are contemplating divorce but are also considering a joint bankruptcy, the timing and likelihood of the divorce should be discussed with the bankruptcy attorney before the joint bankruptcy is filed.

I would much rather have a couple tell me before filing that they are considering divorce than find out after we have filed a joint bankruptcy petition that the marriage has broken down and the spouses are now on opposite sides of a financial dispute.

A joint bankruptcy can be an excellent way for a married couple to deal with their debt, but it works best when both spouses are genuinely working together toward the same bankruptcy goal.

If the marriage is already in the process of breaking down, or if either spouse anticipates that the two of them may soon have substantially different financial interests, it may be better to carefully consider whether a joint bankruptcy is appropriate at all and whether separate bankruptcy representation would ultimately make more sense.

Bankruptcy Does Not Eliminate Child Support or Most Alimony Obligations

Another important consideration is that bankruptcy does not simply wipe out every financial obligation created by a divorce.

Certain domestic-support obligations, including child support and qualifying alimony or spousal-support obligations, are generally not dischargeable in bankruptcy.

So if your divorce involves substantial child support or spousal support obligations, those obligations need to be considered separately from ordinary consumer debt such as credit cards and medical bills.

This is one reason it is important to distinguish between debt that can be discharged in bankruptcy and obligations that arise from the divorce itself.

What If the Divorce Says Your Spouse Is Responsible for the Debt?

This is one of the most misunderstood aspects of bankruptcy and divorce.

Suppose you and your spouse have a $20,000 joint credit-card balance.

As part of the divorce, the judgment says that your former spouse is responsible for paying the entire $20,000.

You might think:

“The divorce court ordered my spouse to pay it, so I’m no longer responsible.”

That may not be true as far as the credit-card company is concerned.

If both spouses are legally liable on the credit card, the creditor generally does not lose its rights against one spouse simply because the divorce court ordered the other spouse to pay the debt.

The divorce judgment determines the financial responsibilities between the former spouses. It does not necessarily change the creditor’s contractual rights.

Therefore, if your former spouse fails to make the payments, the creditor may still be able to pursue you for a jointly owed debt.

This is an important reason why bankruptcy planning before a divorce can sometimes be beneficial.

What Happens If You File Bankruptcy After the Divorce?

Filing bankruptcy after the divorce can also make perfect sense.

Perhaps the divorce has already been completed and you are now struggling with the debts that were assigned to you.

Or perhaps your former spouse agreed to pay certain joint debts but has stopped making the payments.

You may still be legally responsible to the creditor even though your divorce judgment says that your former spouse was supposed to pay.

If those debts are dischargeable, bankruptcy may still provide you with relief.

However, you need to be careful about obligations owed directly to your former spouse.

Not Every Divorce-Related Obligation Is Dischargeable

The Bankruptcy Code contains special rules concerning debts arising from divorce or separation.

An obligation to a former spouse can be treated differently from an ordinary credit-card debt, depending upon what the obligation actually represents.

For example, an obligation that is in the nature of alimony, maintenance or support generally receives special protection in bankruptcy.

A property-settlement obligation may be treated differently.

The wording of the divorce judgment, the nature of the obligation and the circumstances surrounding it can therefore become extremely important.

I would not recommend looking at a divorce judgment and simply assuming that everything you owe your former spouse is either dischargeable or nondischargeable.

The nature of the obligation matters.

What About the Marital Home?

The marital home is another major reason to think carefully about bankruptcy timing.

Suppose you and your spouse own a home with substantial equity.

If you file bankruptcy while you are still married, the bankruptcy trustee will look at the ownership of the property, its value, the mortgage debt and the applicable bankruptcy exemptions.

Michigan bankruptcy exemptions may protect some or all of the equity, depending upon the circumstances.

But if the divorce will result in one spouse receiving the home, the timing of the bankruptcy and any transfer of ownership can become very important.

Do not simply transfer your interest in your home to your spouse because you are getting divorced if bankruptcy is also a possibility without first discussing the situation with a bankruptcy attorney.

A property transfer before bankruptcy can create issues that might otherwise have been avoided.

The same principle applies to other significant assets.

What About Cars, Retirement Accounts and Other Property?

Divorce often involves dividing a substantial amount of property.

That might include:

• The marital home
• Vehicles
• Retirement accounts
• Bank accounts
• Investment accounts
• Business interests
• Tax refunds
• Life insurance
• Personal property
• Inheritances

If bankruptcy is also being considered, you should understand the bankruptcy consequences before transferring property, dividing accounts, paying off debts or making large financial transfers.

Divorce can involve a tremendous amount of movement of money and property.

Bankruptcy law has its own rules concerning assets and property transfers.

Trying to coordinate the two proceedings after the fact can be much more difficult than planning them together from the beginning.

What If Only One Spouse Needs Bankruptcy?

This is another common situation.

Maybe the marriage is ending and one spouse has $100,000 in credit-card and medical debt while the other spouse has very little debt.

In that situation, a joint bankruptcy may not make sense.

It may be more appropriate for only one spouse to file.

But an important question is:

Are any of the debts jointly owed?

If both spouses are legally liable for a debt and only one spouse files bankruptcy, the bankruptcy discharge generally protects only the spouse who filed.

The creditor may still pursue the non-filing spouse.

This is particularly important with:

• Joint credit cards
• Personal loans
• Vehicle loans
• Mortgages
• Home-equity loans
• Other jointly signed obligations

So even if only one spouse needs bankruptcy, the financial consequences for the other spouse still need to be considered.

Chapter 7 or Chapter 13?

The type of bankruptcy you qualify for can also affect the timing decision.

Chapter 7 is often used by individuals who have primarily unsecured debts and qualify for Chapter 7 relief.

Chapter 13 is different. It involves a repayment plan and may be appropriate when someone does not qualify for Chapter 7, has certain types of debts that need to be dealt with over time, or needs the additional protections available under Chapter 13.

If a divorce is pending, the timing of a Chapter 13 case can become particularly complicated because income, household size, support obligations, property ownership and future expenses may all change.

For example, your income and household size while married may be substantially different from your financial situation after the divorce.

That is one reason I would not recommend deciding whether to file Chapter 7 or Chapter 13 without considering what is likely to happen with the divorce.

So, Which Should Come First—Bankruptcy or Divorce?

The answer depends upon your particular financial circumstances.

Before recommending whether bankruptcy should come before or after the divorce, I would want to know things such as:

1. What debts are owed individually by each spouse?
2. What debts are jointly owed?
3. Does either spouse qualify for Chapter 7?
4. What property do the spouses own?
5. Is there equity in the marital home?
6. Are there retirement accounts or other significant assets?
7. Will property be transferred as part of the divorce?
8. Are child support or spousal-support obligations involved?
9. Are there tax debts?
10. Is one spouse going to assume responsibility for joint debts?
11. Are there pending lawsuits, garnishments, foreclosures or other collection actions?
12. Will the divorce substantially change either spouse’s income or household size?
13. Are both spouses genuinely willing to cooperate throughout a joint bankruptcy case?

Those questions can produce very different answers from one couple to another.

Sometimes Bankruptcy Before Divorce Is Better

If both spouses have significant dischargeable debt and both qualify for bankruptcy, dealing with the debt before completing the divorce may simplify the financial side of the divorce.

The couple may be able to eliminate substantial unsecured debt and then proceed with the divorce without those debts hanging over them.

But that approach works best when the spouses are truly working together and are prepared to continue doing so throughout the bankruptcy case.

A joint bankruptcy should not be viewed simply as a convenient way to eliminate debt before the marriage ends. If the relationship has already become adversarial, filing a joint case can create significant representation issues later.

Sometimes Divorce Before Bankruptcy Is Better

In other situations, it may make more sense to complete the divorce first.

For example, if the divorce will substantially change your income, household size, property ownership or financial obligations, those changes may affect your bankruptcy analysis.

There may also be situations where one spouse needs bankruptcy but the other does not.

And if the spouses are already disagreeing about property, debts or financial responsibilities, it may be better to avoid putting both spouses into the same bankruptcy case with the same attorney.

The Most Important Point: Plan the Two Events Together

If you are facing both divorce and bankruptcy, do not assume that you have to choose one or the other without first discussing the timing with a bankruptcy attorney and your divorce attorney.

Your divorce attorney understands the family-law issues.

Your bankruptcy attorney understands the bankruptcy issues.

When the two proceedings overlap, the decisions made in one case can have consequences in the other.

Before you transfer the house, sign over a vehicle, divide a bank account, pay off a joint debt, agree to assume your spouse’s debt, or enter into a property settlement, find out how that transaction could affect a potential bankruptcy.

And if you are considering a joint bankruptcy before the divorce, make sure both spouses understand that they are entering into a bankruptcy case together and that both need to be prepared to cooperate throughout the case.

Timing can matter.

I have practiced consumer bankruptcy exclusively for more than 30 years and have represented more than 25,000 people dealing with financial problems. If you are going through a divorce and also considering bankruptcy, I am happy to discuss your situation with you and explain what I believe is the best way to approach the bankruptcy side of the problem.

You can call my office at 313-962-4656 for a free consultation.