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The complex intersection of divorce and bankruptcy

Money matters often lead to divorce, even at middle- and upper-income levels. In fact, arguing about money is the highest indicator of the risk of divorce, says Kansas State University Associate Professor of Personal Financial Planning Dr. Sonya Britt.

Even if your marital financial picture seems healthy, remember that the income and assets that supported one household will need to support two after divorcing. You will also need to make hard decisions about what to do with debt. A divorce attorney who is also experienced in bankruptcy and other debt solutions can help you answer the below questions.

You may have preconceived notions about what should happen. You may think you should jointly file for bankruptcy before divorcing or assume that after the divorce you will file for bankruptcy to rid yourself of debt as a newly single person. But it is rarely that simple.

The interplay of bankruptcy and divorce is complicated from a legal standpoint. These questions lie at the intersection of at least three areas of law:

  • Divorce law, mostly controlled by Kansas state law
  • Bankruptcy law, mainly federal law, but with some impact from Kansas law
  • Debtor-creditor laws, which can be federal or state, depending on the type of debt

What you need to consider

The kinds of questions that will impact the decision whether to file bankruptcy and whether it should be done individually or jointly before or during divorce, or individually after divorce, include:

  • Is there a home foreclosure or other potential loss of assets that needs to be put on hold by filing an immediate bankruptcy petition before divorce can be filed?
  • What kinds of assets are owned by the couple, individually and jointly, including complex assets like investments, executive compensation and retirement accounts? How does bankruptcy law treat those assets? How would the assets likely be divided in the divorce?
  • What are the natures and sizes of all debts? Were the debts taken out as individuals before the marriage, like student loans? Were they incurred during the marriage singly or jointly? How would a Kansas judge likely divide them in divorce?
  • What is the nature of the debt in relation to bankruptcy law? Are any of them not dischargeable in bankruptcy (remember spousal and child support obligations are not dischargeable nor are some other types)? Is it preferred to try to continue to pay some of them rather than have them discharged?
  • Is there a family business? Is it owned by one or both spouses? Is it a sole proprietorship owned outright by one or both spouses, or is it a partnership, LLC or corporation? Should the business to survive the divorce and the potential bankruptcy?
  • How would bankruptcy impact future credit? How does that compare to the impact of problematic debt?
  • Is there a need to keep the marital home or should it be sold?
  • Are there assets like vehicles secured by loans and would it be advantageous to keep them?
  • Are there other ways to resolve debt problems such as renegotiation or restructuring of debt, a deed in lieu of foreclosure, payments plans or other techniques? Would it be worth selling an asset to pay a particular debt?
  • Would the couple be eligible for Chapter 7 liquidation bankruptcy either jointly or individually? Would a Chapter 13 reorganization plan be preferred?
  • What assets or income might be at risk to satisfy outstanding debts without bankruptcy protection?

The value of finding legal counsel with both bankruptcy and divorce knowledge cannot be overemphasized. Making uninformed choices in a financially difficult divorce can have a devastating impact after the marriage has ended.

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Wiechman & Gasper, P.A.
1101 SW 10th Avenue
Topeka, KS 66604

Phone: 785-379-6642
Fax: 785-233-8893
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