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Ultimate Guide on Bankruptcy and Divorce

Divorce is a great time to review your finances, including your debts. Living on a single income instead of two is tough. Many people discover they need to get rid of some debts so they can support themselves once their divorce becomes final. 

At Surasky Law Firm, our Aiken, SC divorce lawyer can discuss what to expect financially after divorce. This is a critical moment. The choices you make could set you up successfully for the next phase of your life. Alternatively, you might make a critical mistake which sinks you deeper into debt. To assist our clients, we often discuss whether filing for bankruptcy before or after divorce can help provide some financial breathing room. Read on or contact us to find out more. 

What is Bankruptcy? 

Bankruptcy is a court-supervised process for discharging (eliminating) certain debts. Only some debts are discharged, however: 

  • Medical debts 

  • Credit card debts 

  • Personal loans 

  • Court judgments (possibly) 

  • Unpaid taxes (possibly) 

These debts are unsecured, meaning they aren’t backed up by collateral the way a home mortgage or car loan typically are. 

You can’t get rid of a secured debt like your home mortgage without losing your home. However, a bankruptcy could delay foreclosure, at least temporarily. You can also get some more time to catch up on unpaid mortgage payments. 

For couples who are married, a big concern is determining which debts can be eliminated. You might have a joint credit card, meaning it is in both names. This is a joint debt you could eliminate in bankruptcy. You might also have taken a joint personal loan, which you could also discharge. 

Unfortunately, discharging student loans is tough, even though they are technically unsecured loans. You will need to show undue hardship, which an attorney can describe. 

Your 2 Bankruptcy Options: Chapter 7 vs. Chapter 13 

The two most popular bankruptcies are Chapter 7 and Chapter 13. They are very different, and choosing between them might require a lawyer’s help. 

A Chapter 7 takes 5-6 months, typically. You can quickly eliminate qualifying debts. However, this bankruptcy comes with strings. In exchange for eliminating certain debts, you might lose property. The bankruptcy trustee can take assets you own and sell them before sending the proceeds to your creditors. They get some money, and the bankruptcy eliminates the unpaid debt. 

The good news is that South Carolina exempts some property from bankruptcy. For example, you can exempt at least $50,000 in your home. (The amount changes each year based on inflation.) If you’re married, you can exempt double this amount. But any non-exempt property can be sold by the bankruptcy trustee. The trustee can also take non-exempt cash in a bank account and give it to your creditors. 

Only those with lower incomes are eligible for Chapter 7, so you will need to pass a means test. 

With a Chapter 13 bankruptcy, you don’t lose property. Instead, you follow a payment plan which lasts 3-5 years. You make monthly payments to creditors, and unpaid debts which qualify get discharged at the end. 

Should You File Before or After Divorce? 

This is a big question. You should certainly consult an attorney because there are many considerations. Let’s look at a few. 

Can You Pass the Chapter 7 Means Test? 

If you want to file for Chapter 7, you’ll need a sufficiently low income. The means test compares your income to the median for a family of your size. If you’re under, then you pass. If you’re over, it’s still possible to qualify, but there are more complex calculations based on your living expenses. 

Depending on your income, you might pass the means test while married but not if single. For example, your spouse might not work at all. That puts your income below the median once you consider your spouse as part of your household. 

Other people will qualify if single but not married. For example, your spouse might have a very high income. Once out on your own, you can pass the Chapter 7 means test and complete this bankruptcy. 

Still other couples would both qualify individually or while married. It all depends on the facts of your situation. 

Benefits of Filing While Married vs Waiting 

There is no “one size fits all” approach to determining when you should file. The right answer depends on your situation. 

For example, here are the benefits of filing Chapter 7 bankruptcy while married: 

  • You can eliminate joint debts together. Your divorce judge won’t need to assign debts as part of the divorce. 

  • You can probably exempt more property while married. Exemptions are usually worth double for married couples. 

  • You can save on filing fees because you are only filing one bankruptcy. You will only need to pay for one lawyer’s help, also. 

  • You might only pass the means test and qualify for Chapter 7 if you are married. 

Still, there could be drawbacks to filing Chapter 7 bankruptcy while married: 

  • Your income might be too high to pass the Chapter 7 means test. 

  • The automatic stay that goes into effect can delay the divorce. The bankruptcy freezes your estate, and even a family law judge cannot divide property. 

  • You and your spouse might not get along well enough to work collaboratively. 

Needless to say, it makes no sense to file for Chapter 13 if you are contemplating divorce, because it can take 3-5 years to complete. Instead, Chapter 13 might make sense (if at all) only after you are divorced. 

Bankruptcy & Family Law Obligations 

As part of your divorce, a judge might order that you pay child support or alimony. These are unsecured debts. However, the bankruptcy code excludes them from discharge, so you can’t wipe out these obligations in either Chapter 7 or 13. That might be an important consideration when it comes to filing for bankruptcy protection. 

Call Surasky Law Firm to Review Your Options 

Are you contemplating divorce? For some, filing for bankruptcy is an important way of securing their financial future. They can quickly and easily eliminate debts and breathe a huge sigh of relief. To learn more, call our firm to speak with our Aiken, SC divorce lawyer.  


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