Can a Divorcing Couple File a Joint Bankruptcy? And when it’s just not a good idea.

Divorcing couples can file a joint bankruptcy proceeding so long as they are still married on the date the bankruptcy petition is filed and, most importantly, when they agree to be completely cooperative and open about their finances with each other. The bankruptcy proceeding will not stay (i.e., delay) the divorce proceeding in most instances, so that both proceedings can happen simultaneously.

The benefit to a joint bankruptcy proceeding is the cost savings of one case instead of two but the couple must remain transparent for the duration of the proceeding including about their income and employment, finances and expenses, current living situation including any financial contributions and expenses of a new significant other, etc. There can be no secrets or confidences between the attorney and one of the two spouses that are jointly represented.  Even the most cordial of divorcing couples can turn sour when a disagreement arises in the divorce especially when it comes to the hot topics of spousal support, custody and division of assets.

Married couples can also file separate bankruptcy cases, and it is common for one spouse to file bankruptcy while the other spouse does not.

The ideal situation for a jointly administered bankruptcy case is when the divorcing couple is eligible to file a joint chapter 7 proceeding, which typically lasts three months start to finish. If the divorcing couple is not eligible for chapter 7, they can still file a joint chapter 13 however this is often can be impractical since most chapter 13 plans last five years.

There are also situations where one spouse (or both) may benefit from divorcing first, especially in a situation where one spouse does not qualify for chapter 7 without a support obligation in place. It becomes difficult and potentially a conflict of interest for the attorney when the best interests of one spouse conflicts with the other’s best bankruptcy plan. When any conflict happens, one spouse needs to seek separate counsel to file a separate bankruptcy case. If there’s any foreseeable conflict, it may be better to pursue separate bankruptcy proceedings from the start.

Generally to be eligible for chapter 7, the combined annual gross income must be no more than the applicable state median income for their household size. Under the “means test” calculation, it may still be possible for otherwise above-median debtors to qualify for chapter 7 when the divorcing couple maintains two separate households and when there are certain expenses and/or debts owed, including above-average health care costs, domestic support obligations, mortgage arrears owed, significant state or federal taxes are owed, and when there are mortgage or other secured debt payments that will be maintained. Sometimes eligibility for chapter 7 becomes possible after divorce, especially if the couple is still residing together now and one or both spouses only qualifies for chapter 7 once they have a smaller, separate household for the purposes of the means test.

Also see Bankruptcy and Divorce: What Should Come First