Is it better to declare bankruptcy before or after a divorce in Arizona? The answer depends on your unique situation. Bankruptcy and divorce are closely connected, particularly regarding the division of assets and property.
If you are overwhelmed by debt collectors or creditor lawsuits, filing for bankruptcy can help you get back on your feet. The experienced bankruptcy and divorce lawyers at Colburn Hintze Maletta can help you understand how bankruptcy impacts divorce and guide you on whether to file before your divorce or afterward.
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Bankruptcy and Divorce
How Does Bankruptcy Impact a Pending Divorce
Bankruptcy can significantly impact a pending divorce, particularly regarding property division and financial obligations. Here are the primary ways bankruptcy can affect ongoing divorce proceedings in Arizona:
- Automatic Stay
Filing for bankruptcy immediately triggers an automatic stay under federal bankruptcy law (11 U.S.C. § 362), which temporarily halts most legal proceedings, including divorce cases. The stay prevents creditors from collecting debts and may delay property division and other financial aspects of the divorce until the bankruptcy case is resolved.
- Division of Property
When a spouse files for bankruptcy during a pending divorce, the marital assets become part of the bankruptcy estate controlled by a bankruptcy trustee. The trustee will liquidate non-exempt assets to pay creditors. As a result, the divorce court must wait until the bankruptcy case is concluded or obtain permission from the bankruptcy court to divide the property.
- Domestic Support Obligations
Bankruptcy does not discharge domestic support obligations such as alimony and child support (11 U.S.C. § 523(a)(5)). Even with the automatic stay in place, divorce courts retain jurisdiction over support matters. However, if a spouse files for bankruptcy, the court may require additional documentation or hearings to ensure that support obligations are met.
- Non-Dischargeable Divorce Debts
Certain divorce-related debts cannot be discharged through bankruptcy. Property settlement debts (11 U.S.C. § 523(a)(15)) and obligations resulting from divorce or separation agreements remain enforceable despite the bankruptcy filing. Thus, a spouse cannot avoid these debts through bankruptcy proceedings.
- Impact on Joint Debts
If a spouse files for bankruptcy during a divorce, it can affect the other spouse’s liability for joint debts. Even if one spouse discharges their responsibility for a joint debt, the creditor may still pursue the other spouse for repayment.
Bankruptcy has far-reaching implications for a pending divorce in Arizona. The automatic stay can delay divorce proceedings, the bankruptcy estate may influence property division, and support obligations remain intact.
Types of Bankruptcy
Here’s a detailed look at the main types of bankruptcy and how they relate to family law and divorce in Arizona:
①Chapter 7 Bankruptcy
Known as “liquidation bankruptcy,” Chapter 7 involves selling non-exempt assets to pay off unsecured creditors. It is often the quickest form of bankruptcy, typically lasting 4-6 months.
- Eligibility Requirements:
To qualify for Chapter 7, individuals must pass the means test, which compares their income to Arizona’s median income level. If the income is below the median, the person can file. - Impact on Divorce in Arizona:
Filing for Chapter 7 can discharge unsecured debts like credit card bills and medical expenses, simplifying the division of debts during divorce in Arizona. However, it can also affect marital property division if significant non-exempt assets are involved.
②Chapter 13 Bankruptcy
Chapter 13, also known as “wage earner’s bankruptcy,” allows individuals with a regular income to reorganize and repay their debts over 3-5 years. It provides an opportunity to keep certain assets while gradually paying off creditors.
- Eligibility Requirements:
Individuals must have a steady income, and their unsecured debts cannot exceed $2,750,000 (as of 2023). They also need to submit and adhere to a court-approved repayment plan. - Impact on Divorce in Arizona:
Chapter 13 enables spouses to retain more assets while managing debt through a repayment plan. However, filing during divorce in Arizona can complicate property division and may require the cooperation of both spouses. Using this bankruptcy type, spouses can include indemnification clauses in their divorce agreements, ensuring both parties meet their financial obligations.
③Chapter 11 Bankruptcy
Primarily used by businesses, Chapter 11 allows reorganization of debts while keeping the business operational. Individuals with substantial debts and assets can also use Chapter 11 bankruptcy.
- Eligibility Requirements:
There is no specific debt limit for Chapter 11. However, individuals must present a feasible reorganization plan to the court. - Impact on Divorce in Arizona:
Chapter 11 can protect valuable business assets during divorce. However, its complexity and cost make it less suitable for most individuals compared to Chapters 7 and 13.
Understanding the different types of bankruptcy is crucial for anyone facing divorce in Arizona. Chapter 7 offers a fast resolution but can affect asset division. Chapter 13 allows for repayment while retaining assets, and Chapter 11 is suitable for high-debt individuals or business owners.
Is it Better To File Before or After a Divorce?
Deciding whether to file for bankruptcy before or after a divorce in Arizona depends on your unique financial situation. Here’s a breakdown of the pros and cons of each option:
Filing Before Divorce
Filing jointly before a divorce can save money on filing fees and attorney costs, as you only need to pay once for a joint bankruptcy petition. Jointly held debts like credit cards or medical bills can be discharged together, simplifying the divorce process.
Combined household income might qualify you for Chapter 7 bankruptcy, which typically discharges unsecured debts within 4-6 months. By discharging unsecured debts, the couple has fewer liabilities to divide during the divorce process. However, the automatic stay can delay divorce proceedings, especially if marital assets are involved.
Additionally, joint bankruptcy proceedings during an already strained marriage can add emotional stress to the process.
Filing After Divorce
After divorce, each spouse can file for bankruptcy independently, protecting their own interests. Post-divorce, one spouse’s lower income might help them qualify for Chapter 7 bankruptcy individually. Filing after divorce provides clarity about which debts are individually yours and which are shared.However, each spouse will need to pay separate filing and legal fees, which can be financially burdensome. If joint debts remain unresolved during the divorce, one spouse could be left solely responsible after the other files for bankruptcy.
Filing before a divorce can be advantageous when both parties agree on filing jointly, seeking to save on costs, simplify debt division, and possibly qualify for Chapter 7 bankruptcy.Filing after a divorce might be more beneficial if individual income levels and responsibilities make separate filings more strategic, especially to protect one’s interests.
What Debts are Dischargeable in Bankruptcy During Divorce?
Bankruptcy can discharge many unsecured debts like credit card balances, medical bills, and personal loans but does not affect domestic support obligations, property settlement debts, or most student loans.
Dischargeable Debts:
- Credit Card Debt:
Credit card balances can be discharged under both Chapter 7 and Chapter 13 bankruptcy. If the debt is jointly held, bankruptcy can remove both spouses’ liability, easing financial pressure during divorce proceedings. - Medical Bills:
Medical expenses are generally considered unsecured debts and can be discharged during bankruptcy. - Personal Loans:
Unsecured personal loans, such as those from banks or private lenders, can typically be discharged in bankruptcy. - Utility Bills:
Overdue utility bills are often dischargeable, offering relief from past-due amounts owed to service providers.
Non-Dischargeable Debts:
- Domestic Support Obligations:
Domestic support obligations (DSOs), such as child support and alimony, are not dischargeable under federal bankruptcy law (11 U.S.C. § 523(a)(5)). Arizona courts prioritize these obligations, ensuring that bankruptcy proceedings do not affect them.
- Property Settlement Debts:
Debts related to property settlements, including those outlined in divorce decrees or separation agreements, are non-dischargeable (11 U.S.C. § 523(a)(15)). For example, if one spouse is ordered to buy out the other’s share of the marital home, this debt remains enforceable despite bankruptcy. - Student Loans:
Student loans are typically non-dischargeable unless the debtor can prove “undue hardship,” which is challenging to demonstrate (11 U.S.C. § 523(a)(8)). - Tax Debts:
Recent federal, state, and local tax debts generally cannot be discharged. However, older tax debts may qualify for discharge under specific conditions.
How a CHM Family Law Attorney Can Help
Managing bankruptcy and divorce requires knowledgeable legal advice. The family law attorneys at Colburn Hintze Maletta (CHM) are experienced in bankruptcy planning and can help you decide whether to file for bankruptcy before or after divorce based on your unique financial situation. They will ensure fair division of assets and debts according to Arizona law, and provide guidance on child support and alimony, which are not dischargeable in bankruptcy.
Contact the family law attorneys at Colburn Hintze Maletta for personalized solutions that protect your interests. Reach out today at Colburn Hintze Maletta or call 602-825-2500 to schedule a consultation.
Attorney Darin Colburn has experienced first-hand just how difficult going through a family law matter such as divorce is when his parents divorced when he was 6 years old. Twenty years later, he has devoted his entire legal career to helping those facing similar issues. Darin attended the University of Arizona and graduated Cum Laude from the Eller College of Management. Darin is an experienced trial attorney that excels in high-net-worth divorce, complex business valuations, and messy child custody disputes.
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