Add death and taxes and we have a perfect storm of unhappiness. At least bankruptcy and divorce aren’t certainties. However, they’re just as uncomfortable to discuss. Money and personal finance disagreements are a leading cause of divorce in the United States. In fact, one study cites arguments about money as the top predictor of divorce. Struggling with your finances and your marriage all at the same time is overwhelming. If you do end up in that difficult position, you need to know about your options.
Marriage and money are closely tied together – a marital home, joint bank accounts and credit cards, jointly owned cars, and jointly incurred expenses lend a whole new degree of complication to your pre-nuptial finances. If you’re considering filing for bankruptcy, you’ll need to think carefully about how to treat your joint assets and debts. First, let’s look at marriage and bankruptcy without the complication of divorce.
How Bankruptcy Works
As a consumer, you’ll file under one of two main types of bankruptcy: Chapter 7 or Chapter 13. Under Chapter 7, state or federal law will exempt most of your property from the bankruptcy process. A bankruptcy trustee will take control of the rest, sell it, and use the proceeds to pay your creditors. At the end of this process, which usually takes a few months, the bankruptcy court will discharge your remaining unsecured debt. Under Chapter 13, you’ll work with a bankruptcy trustee and your creditors on a 5-year repayment plan. You’ll make your regular payments on your secured debts and pay the remainder of your disposable income toward your unsecured debts. At the end of the plan, the court will discharge your remaining unsecured debt.
A married couple may choose to file for bankruptcy jointly, or either or both spouses may file individually. If you file jointly, you may be able to double some of your Chapter 7 exemptions, protecting more of your property. Under either chapter, you’ll receive discharge for both your joint debts and each of your individual debts. If only one spouse is considering bankruptcy, the situation may be more complicated.
Community Property vs. Common Law Property States
The United States has two major property regimes for married couples: community property and common law property. Every state uses one of these two systems. Most use the common law regime. At common law, the person whose name is on the title owns the property. If there’s no title but you paid for it or received it as a gift, it’s yours. If you and your spouse own property jointly, you each legally own half.
Under a community property regime (which you’ll find in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), you and your spouse share everything you earn during marriage and everything you purchase during marriage equally. You’ll generally still personally own property you purchased before you were married, property given to you alone, and property you alone inherit.
The property regime in your state has serious ramifications for your bankruptcy. In a community property state, all of the couple’s property may be subject to the bankruptcy proceeding even if only one spouse files for bankruptcy. In a common law property state, only the filing spouse’s property is subject to the bankruptcy process.
If you and your spouse have a lot of joint debt, you may choose to file jointly. A joint filing will wipe out all of your joint and individual debt. You’ll only have to pay one filing fee and your attorney will probably charge less for a joint filing than she would for two single filings (although it will still be somewhat more expensive than one single filing). If you choose to file jointly, all of your property will be subject to the bankruptcy proceedings.
Pros and Cons of Joint Filing
Before you jump into joint filing, remember that it may limit some of your options in bankruptcy. Chapter 13 bankruptcy requires the creation of a five-year repayment plan for your debts. The court will determine how much you have to pay based on your disposable income. If both you and your spouse work, you’ll be able to make a higher payment and you’ll probably end up paying off more of your debts before your discharge.
In Chapter 7 bankruptcy, or “liquidation,” the bankruptcy trustee will sell your non-exempt assets and pay the proceeds to your creditors. After this process, your remaining debt will be discharged. However, not everyone qualifies to file under Chapter 7. To qualify, you have to earn less than the state median income. The state median income for a single individual in New Jersey is $60,317. However, the equivalent figure for a couple is $70,150, far less than double. If you make more than the median income, you’ll have to pass a complex means test to prove that you truly need to file under Chapter 7. So, you both might qualify for Chapter 7 individually, but not as a married couple.
On the flip side, you may prefer to file under Chapter 13 and filing jointly can make that easier. You’re more likely to be able keep your home, your car, and other important assets under a Chapter 13 plan than Chapter 7. To file under Chapter 13, you’ll have to provide the court with a list of your income and expenses to show that you can make plan payments. With the income of two earners rather than one, you’ll have an easier time proving to the court that you can keep up with your Chapter 13 plan payments.
Finally, joint filing may make protecting certain property more difficult in some states. When you file for bankruptcy, certain property is exempt from the bankruptcy estate, meaning it can’t be sold to repay creditors. In some states, married couples can double the amount of their exemptions. In others, a married couple has the same exemptions as a single filer. In New Jersey, you’ll be able to double your exemptions, so you’ll be able to protect the same amount of property whether you file jointly or separately.
Divorce in New Jersey
Now that we’ve gone through the basics of filing bankruptcy as a married couple, let’s look at the impact that divorce has on the process. There are several legal grounds for divorce in New Jersey. You may file for divorce if your spouse has committed adultery, deserted you for at least 12 months, suffers from an addiction, subjects you to extreme physical or mental cruelty, or is institutionalized for two consecutive years. You may also file for a “no-fault” divorce after at least 18 months of separation during which you live at separate addresses. N.J.S.A. 2A:34-2. When you decide to file for divorce, you’ll need to notify the court and your spouse and you’ll both have to appear before the Superior Court in New Jersey in the county where one or both of you live. The court can grant your divorce in as little as a month if you reach a settlement regarding the division of property.
Effects on Bankruptcy
If you’re struggling with debt and planning to get divorced, you’ll need to determine whether you want to file for bankruptcy before or after your divorce. If you file before your divorce, you’ll have the option to file jointly or singly. You’ll have to disclose all of both of your financial information to the court and the bankruptcy trustee. The court wants to make sure you’re listing all of your relevant assets and not hiding anything from your creditors. In most cases, most, if not all, of your assets will be exempt and you’ll be able to keep them. However, any non-exempt assets will become part of the bankruptcy estate. That may complicate property settlement negotiations during a divorce, especially if only one spouse is filing for bankruptcy.
On the other hand, a bankruptcy filing may actually ease the divorce process. It can wipe the slate clean of debt that would otherwise have been allocated through the divorce proceeding. It will likely also clear up ownership issues of disputed property in a common law property state. On the flip side, you can file for divorce before bankruptcy and the divorce settlement will clear up ownership issues.
For the reasons discussed above, filing jointly may allow you to protect certain assets better than you would be able to do if you filed alone and can wipe out all of your debt so you can start over with a clean slate. If your divorce is amicable, you may decide to file for bankruptcy first for that reason. If your divorce is less than amicable, you may prefer to simply separate the marriage and the assets and deal with your debt (or allow your spouse to deal with his or her debt) alone.
In a recent decision, the Supreme Court overturned Section 3 of DOMA. Same-sex married couples now have the same options as heterosexual couples when it comes to bankruptcy. Unmarried same-sex couples, like unmarried heterosexual couples, must file singly.
What should you do?
Remember that both spouses are responsible for debts incurred during the marriage. If you don’t file for bankruptcy first, you’ll both still be liable after the divorce. If one of you fails or refuses to pay, the other will still be on the hook. If an ex-spouse files for bankruptcy but the other ex-spouse does not, the non-filing spouse can be left with all of the marital debts. With the stress of a divorce, contemplating bankruptcy may seem like too much, but it may be the best option. Wipe the financial slate clean and clear up the complications of debt so you can both move on with your lives. Contact an experienced attorney to discuss how bankruptcy may affect your divorce (and vice versa) and how to make the process easiest for both of you.