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

More on Divorce and Bankruptcy: How do Child Support, Spousal Support (Alimony / Maintenance) and Property Settlements Impact either Chapter 7 or Chapter 13 Bankruptcy?

How certain payments owed under a divorce or family law decree—including child support, spousal support (also called maintenance or alimony) and even property settlements or cash equalizers— may impact your bankruptcy filing depends on whether you are the recipient such payments or the obligator of such payments, i.e., the payer.

For a recipient of child support, spousal support or other domestic support obligations (also called “DSO”), this support income must be added to all other sources of income in order to determine whether one is eligible to file chapter 7 under the means test. Generally speaking, if one’s total annual income from all sources including domestic support income is less than the median income for your state and household size, you will qualify for chapter 7. However if you are above the median income, you are instead steered toward filing chapter 13 with some exceptions. Median income varies by state and household size and is regularly updated. Especially if you are ‘on the line’ of the median income or above it, it is the initial job of any bankruptcy attorney to calculate the means test and advise on eligibility for chapter 7 under current median income standards.

For the payer of domestic support obligations, such support payments are typically allowed as an expense on the means test which effectively reduces one’s annual income. This means that if your regular wage or self-employment income is above the median income for your state and household size but the subtraction of domestic support payments brings you back down below the median income, then you would qualify for chapter 7 bankruptcy. Qualification for chapter 7 via this route is also called “rebutting the presumption of abuse” on the means test. However if one’s income is such that the subtraction of DSO payments does not reduce the income below the median or alternatively if one is not actually making the required DSO payments, then they may not qualify for chapter 7 and instead file chapter 13.

The means test involves various additional factors other than income and domestic support payments. For more information about median income and the means test, see What is the “Means Test” and Why Does it Matter in Bankruptcy? and 2014 Median Income in Minnesota.

Regarding property settlements (also sometimes referred to as equalization payments or cash equalizers), these are usually ordered in a divorce based on a fair distribution of marital assets rather than a need for financial support by one spouse. For example, a wife may be ordered to pay a property settlement to her ex to “equalize” her award of a family home having equity that was built up during the marriage. In this case, the wife that keeps the family home may be required to pay her ex-spouse one half of the home equity by a certain future date. Property settlements also commonly arise when one spouse is assuming most or all of joint debts acquired during the marriage and the other spouse emerges from divorce debt free other than the obligation to pay the property settlement. In any event, unpaid property settlements and cash equalizations are valuable assets that must be listed in the bankruptcy case of the recipient.

As with all assets, any individual bankruptcy debtor is limited as to the total value of assets which may be exempt and it’s possible that a portion of a large unpaid property settlement (above approx. $12,000) could be non-exempt if the recipient files bankruptcy. In this case, the non-exempt portion of the property settlement would become property of the bankruptcy estate and either liquidated in chapter 7 or, in chapter 13, at least the equivalent of the non-exempt portion must be paid into the plan. This situation is also circumstance dependent and may be affected by the facts of one’s situation, including whether the obligator spouse has a practical ability to pay the settlement.

For the payer of the property settlement, this award is a liability that must be listed in the creditor schedules. Unlike most debts, one’s liability to pay a property settlement is not usually discharged in chapter 7 bankruptcy however may be discharged under some circumstances in chapter 13 bankruptcy.

A qualified bankruptcy attorney will explain more how a property settlement would be treated under your specific circumstances, the chapter of bankruptcy you file and local bankruptcy law. For more information on how property settlements are treated in chapter 13, see Bankruptcy and Divorce: Some Payments in a Divorce Decree May be Dischargeable in Chapter 13.

Also read more about family law and timing considerations in bankruptcy: Bankruptcy and Divorce: What Should Come First?

Located in Edina, Minnesota, attorney Lynn Wartchow represents clients in all chapters of bankruptcy in Minneapolis, St. Paul, Ramsey and Hennepin County, and throughout Minnesota. Contact for a free consultation.

Bankruptcy and Divorce: Some Payments in a Divorce Decree May be Dischargeable in Chapter 13

The rule of thumb is that bankruptcy will discharge most unsecured debts that are not taxes or domestic support obligations (which are two of the most common “non-dischargeable debts” that will survive a bankruptcy). This means that child support, domestic support owed to an ex-spouse and many taxes are never discharged in any form of bankruptcy. However a fine line can be drawn where some payment obligations in a divorce decree can still be discharged, but only in a Chapter 13 bankruptcy.

The divorce obligations that can be discharged in Chapter 13 bankruptcy (but not in Chapter 7) are payments that relate to property settlements such as a cash equalizer. Cash equalizers are common, for example, when there is equity in a homestead that needs to be fairly divided between the spouses when one spouse will stay on deed to the home. The general standard for discharging these types of divorce-related obligations is whether the payment is “domestic support” in nature (non-dischargeable) or is more of a property settlement (dischargeable).

In Chapter 13 cases, payments due to an ex-spouse on account of a property settlement are not allowed in the debtor’s budget since these obligations typically are considered general unsecured debt similar to a credit card. Also like a credit card, the ex-spouse can file a proof of claim in the Chapter 13 case to claim their right to receive a proportionate distribution paid to all unsecured creditors, with any amount unpaid being discharged at the end of a successfully completed Chapter 13 plan. While usually this distribution is only fraction of the amount that is owed, unsecured creditors may nonetheless file a claim.

Support obligations are never dischargeable in any form of bankruptcy and a Chapter 13 debtor will be expected to continue making these payments during the course of their Chapter 13. These include child support and domestic support owed to an ex-spouse, but not necessarily property settlements, cash equalizers and possibly other payments owed.

Located in Edina, Minnesota, Lynn Wartchow represents clients in all Chapters of bankruptcy in Minneapolis, St. Paul, Ramsey and Hennepin County, and throughout Minnesota.

Bankruptcy and Divorce: What Should Come First?

Divorce is often a precursor to bankruptcy, for either one or both of the divorcing spouses find themselves in need of discharging debts in the face of earning only a single income once again. The difficult question is determining what should come first: the bankruptcy or the divorce.

The answer of course depends on a multitude of circumstances including whether the spouses can cooperate and agree to a joint (and amicable) bankruptcy filing before the divorce is finalized, how long it may be before a divorce decree is entered, which assets owned jointly versus individually, whether there are any joint debts, how the incomes of each of spouse may affect a joint bankruptcy both during a bankruptcy proceeding and after the divorce is final.

When divorce and bankruptcy overlap, the first question is timing. Often family  attorneys may advise their clients to file a bankruptcy before finalizing the divorce, which has the optimistic effect of clearing up those debts so the divorce decree has one less thing to divide up between the spouses. However, there are reasons why it may be better to wait to file bankruptcy until after the divorce is complete, especially for debtors that may owe monetary obligations to their ex-spouse as part of the divorce decree. While child support and alimony (or maintenance, as it is sometimes called) that are based on the financial need of the other spouse are not dischargeable in bankruptcy, certain other financial obligations to one’s ex-spouse may be dischargeable in bankruptcy, including property settlements and other financial obligations that are not based on the financial need of the other spouse. Under some situations, these types of divorce decree obligations can be discharged in a Minnesota consumer bankruptcy filed under Chapter 13.

Another reason to wait to file bankruptcy until after a divorce is finalized: a divorce decree can slap a debt back on one spouse, effectively mooting the entire reason for filing bankruptcy. In Minnesota—which is not a community property state—one spouse typically cannot be held liable for debts incurred solely by their spouse unless both spouses signed the credit agreement (there are some exceptions, such as medical debts which can be enforced against one’s spouse under state statute). A divorce decree usually divides all debts amongst the spouses. For example, the husband may assume the entire responsibility for all joint  and individual credit cards in his name while the wife will take over the homestead and accompanying home mortgages and individual credit cards in her name. If the husband files bankruptcy before the divorce is finalized and discharges his legal responsibility to his credit card companies, the divorce decree can still subject the husband to responsibility to his wife for any payments she is forced to make on the joint credit cards that she will still owe in spite of his bankruptcy because she did not file with him. In this example, while the credit card companies could not sue the husband because of his discharge received in bankruptcy, however they could still sue the wife for the joint debts and the wife, in turn, can then sue her ex-husband for indemnification under the divorce decree if she is forced to pay on the joint credit card debts that were otherwise assigned to him. The point is that you never know how the debts will be divided until the stamp is dry on the divorce decree, and you don’t want to waste a bankruptcy discharge (which you can only get once every 8 years) on debts that may be re-assigned to you in the divorce.

Other issues to be considered when bankruptcy and divorce intersect: equity in a  homestead may not be exempt if it is no longer one’s homestead (a marital lien alone does not satisfy “occupancy” to obtain a Minnesota homestead exemption); child support and spousal maintenance counts as income for the purposes of qualification for Chapter 7 under the means test; an indemnification clause in the divorce decree may undermine the effect of a bankruptcy discharge; unless a full disclosure is made and the divorcing spouses are cooperative, the bankruptcy attorney may have conflict of interest issues that prevent joint representation of divorcing spouses.

Lynn Wartchow is a bankruptcy attorney located in Edina, Minnesota and representing clients in both Chapter 7 and Chapter 13 consumer bankruptcy proceedings throughout Minneapolis and St. Paul in Minnesota.