Should I file for bankruptcy before, during or after my divorce?
Benefits to filing for bankruptcy first: Tenancy by the Entireties.
If you live in Florida or you have property in Florida to be included in the bankruptcy, you can take advantage of a property right or bankruptcy exemption known as “Tenancy by the Entireties” often abbreviated as T by E. This is only available to married couples and it is one of the most valuable “bankruptcy exemptions” you can use to protect pure marital assets (assets acquired by you and your spouse simultaneously during the term of your marriage, titled to both you and your spouse.)
Think of bankruptcy exemptions as laws that protect a modest amount of property types or property value from the claims of your creditors or the claims of your bankruptcy case trustee, who is appointed to represent your creditors in a general capacity.
In Chapter 7, property that is unprotected by an exemption and of a “reasonably significant value” can be sold off (“liquidated”) by the bankruptcy trustee appointed to represent your unsecured creditors in a general capacity and to raise money for those creditors. Sometimes a small pie is split between many creditors and they each get pennies on the dollar. The trustee will also earn a commission if your case is an “asset case,” meaning property is liquidated.
All it takes in the Southern District of Florida (sometimes but not always —- it’s really up to the trustee) is a few thousand dollars worth of unprotected assets to warrant the cost of administration of your assets. Suppose you had a right to receive an income tax refund of $5,000.00. There is very little expense involved in the trustee liquidating that asset. The refund check could be intercepted by the trustee merely by writing a letter to the IRS. But suppose you had a vehicle worth $5,000.00?
If the vehicle was titled in your name, you would benefit (in Florida) from a motor vehicle exemption worth $1,000.00. That means if the vehicle is liquidated, the trustee would have to pay you the amount of your exemption in cash. Thus, from the $5,000.00 vehicle the trustee would pay out $1,000.00 to you.
But wait, there’s more. The trustee has to hire an auctioneer to store the vehicle and to pay a buyer’s premium that could run up another $1,000.00 in costs. That would mean the most the trustee could make (for the bankruptcy estate) on that vehicle is $3,000.00. If there is a secured loan against the vehicle, that would further reduce the amount the trustee could hope to net on a sale, because the trustee would have to pay off the loan from the sale proceeds.
Many times, the cost to liquidate the asset outweighs the benefit of the actual sale. But now, suppose you had a vehicle that was worth $10,000.00 and there was no loan against it. Even using your $1,000 automobile exemption and factoring in the trustee’s cost of sale (let’s assume $1,000.00), the trustee could still net $8,000.00. You could have a problem here. Although there’s usually an option to “buy back” your interest from the trustee (and usually for a discount) what if there was a better way?
That “better way” would be to have purchased the vehicle with your spouse as Tenants by the Entirety. Remember, the devil is always in the details, and words matter here!
The use of the conjunctive “and” is very important on the title whether we are talking about bank accounts, automobiles or even real property (e.g., “Tom Jones and Betty Jones”) or no conjunctive at all (e.g., Tom Jones Betty Jones) or even a more formal designation (“Tom Jones and Betty Jones, His Wife”) will all be sufficient to obtain a presumption that title is held as Tenancy by the Entireties.
You do NOT want to title your property in a manner that is contradictory to Tenancy by the Entireties (e.g., “Tom Jones or Betty Jones”) since the use of the conjunctive “or” means that either party may act independently of the other, without the other’s permission, unlike Tenancy by the Entirety, where both spouses are (in theory) required to act jointly in decisions concerning the asset.
In reality, many banks will accept a written designation by the spouses that each may act independently of the other even though the account is designated or treated as a Tenancy by the Entireties bank account.
The beautiful thing here in Florida is that Tenancy by the Entireties applies to both real and personal property. And if you’re coming from a long-term marriage, you won’t have to hunt down receipts from years ago to prove that you purchased the property together with your spouse. The presumption will be that you purchased the property as Tenants by the Entirety so long as you assert it and the words of title don’t contradict it.
Unlike the motor vehicle exemption and many others, there is no dollar limit to the value of protection of Tenancy by the Entireties making this property right one of the most valuable tools in your bankruptcy arsenal.
BUT TAKE HEED: once your marriage is terminated, so is your Tenancy by the Entireties property right!
It will automatically convert to a tenancy in common property right, where each of you (ex-spouses) will have a divisible 50%-50% interest in the asset, reachable by even single creditors (creditors of only one of you) and accordingly reachable by the bankruptcy trustee for liquidation purposes.
Preservation of T by E, is a compelling reason to go bankrupt first, and divorce second.
Other Reasons to Go Bankrupt First: Save on fees!
If both spouses have a lot of debt (sadly, one of the most common reasons for divorcing) as a married couple, you can file a joint bankruptcy petition and the cost will usually be a lot less than if you were to each file separate bankruptcy cases. (Most law offices will only charge a few hundred dollars more for handling a joint bankruptcy case.)
Discharge Potentially Non-Dischargeable Debt from Divorce Court.
Particularly if you are the “breadwinner” of your household, you might want to encourage your spouse to join in on your bankruptcy case, in order for both of you to exit the marriage with as close to a fresh start as possible.
Often the “breadwinner” in divorce, is charged with continuing to pay for many of the household financial obligations, even obligations that may have been incurred by the other spouse. Divorce judges in Florida handle many complex issues, not only division of marital assets, but also division of marital debts.
The “bright line” tests in bankruptcy as to who owns an asset and who owns a debt are far more blurred in Divorce Court, and Divorce Court Judges can slice through the formalities of title like a steak knife going through butter.
Those words of title that matter so much in Bankruptcy Court? Well, they mean a whole lot less in Divorce Court.
Picture a situation where you plan on divorcing first, and filing for bankruptcy second. You are the breadwinner. Your divorce judge decides not only will you pay child support but you will also pay alimony to your spouse because of the long-term duration of your marriage.
As part of “alimony” your divorce judge orders you to continue to pay down and pay off your spouse’s credit card debt. If this “decree” is in the nature of alimony, then you are cooked, carrying this debt into your own subsequently-filed bankruptcy case. You will NOT be able to discharge this debt if it is considered alimony.
Maybe after your divorce, when things cool down, you may be able to convince your ex-spouse to file her own bankruptcy case to discharge the debt, but it is far better to strike while the iron is still hot (while you are still married).
Proceed with caution: There is case law out there that will cause you a lot of grief. If the debt is in the nature of non-dischargeable alimony, even if your ex-spouse is able to discharge it in her own bankruptcy case, guess what? Her creditors are now YOUR creditors and they may argue that you cannot discharge her marital debt since it was deemed to be non-dischargeable alimony. Yikes!
NOTE: If the debt is categorized as part of an equitable distribution of assets and liabilities you may be able to discharge the debt using Chapter 13 (plan of repayment) but not under Chapter (“fresh start”) 7.
Reasons to File for Divorce First, and Bankruptcy Second.
In a typical chapter 7 consumer bankruptcy case, your eligibility to file is determined by a complicated formula (the “Means Test”) that factors in ALL household income (income from you and your spouse and others contributing to your support) regardless of whether your spouse is filing for bankruptcy with you, and pits it against a series of actual monthly expenditures and/or IRS standardized deductions for certain expenditures, to determine the amount of your “disposable monthly income.”
If your non-filing spouse is a high-income earner, under the formula it is possible that her income will jeopardize your ability to qualify for Chapter 7 bankruptcy relief, Chapter 7 being the fastest form of bankruptcy relief. Your spouse’s high income, could mean that your only recourse would be to file under chapter 13 (plan of repayment for debts), and usually chapter 13 bankruptcies have a 5-year duration.
Do you really want to stay married for another 5 years simply to fund your Chapter 13 bankruptcy plan? Only you can answer that question.
Filing for divorce and bankruptcy simultaneously is not recommended.
The multiple proceedings will add a layer of complication to both cases. When you file for bankruptcy the appointed trustee legally “steps into your shoes” as respecting your unprotected assets. Sometimes it is not immediately known whether an asset is protected or unprotected, and the issue will need to be resolved the trustee, or if an agreement cannot be reached with the trustee, then with your bankruptcy judge.
The trustee would have a right to intervene in your divorce case because the nature of divorce involves a division of marital assets which will often include assets otherwise belonging to the bankruptcy estate.
The formalities that a bankruptcy trustee must adhere to in making decisions that affect your general creditors, is sure to slow the divorce process down, as well as the bankruptcy process. Injecting the bankruptcy trustee into the divorce will also limit some of the power, discretion and influence you would otherwise have in the decision-making process.
If the bankruptcy trustee is not fully versed in matters of divorce and family law, the trustee could be forced to hire his own lawyer to represent the bankruptcy estate’s interest in the divorce, adding an additional layer of complication, expense and time resources to both cases.