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What You Need to Know About Bankruptcy and Divorce

Hunt Law Firm Nov. 2, 2023

Man and woman holding ripped paper with dollar signFinancial troubles can be a leading cause of divorce, but what happens when you are facing divorce and bankruptcy? Which one should you file first? What happens if you file simultaneously? There are many factors to take into consideration, and you should consult with an experienced attorney before making a decision. 

Divorce ends a legal union and involves a division of property and assets obtained during the time of marriage. Texas is a community property state, which states that everything acquired during your time together is split 50/50, including debts. Bankruptcy, depending on the option you pick, will handle outstanding debts in one of two ways – either through a repayment plan or through liquidation of non-exempt assets. 

Bankruptcy can be a bit tricky when both spouses’ incomes are calculated together. The total could prevent a Chapter 7 bankruptcy petition, which is the quickest route to discharging most debts. In that case, it might make more sense to wait until divorce proceedings have ended, and each spouse’s income is thereby separated. Again, these calculations can be complicated, and professional help is the best route to resolving matters. 

If you are considering divorce, or already in the process, in or around Dallas or Fort Worth, Texas, and also overwhelmed by debt, contact the Hunt Law Firm. Attorney Gwendolyn E. Hunt has more than three decades’ experience in helping individuals and families resolve financial crises through bankruptcy filings, and she stands ready to help you.  

Divorce and Bankruptcy: Which First? 

Divorce is a trying enough time, but coupled with bankruptcy, the emotional shock waves can only increase. There are several decisions to be made when it comes to bankruptcy. Since Texas’s community property standard means that any debt acquired by either spouse during the time of marriage becomes a joint obligation, in divorce proceedings, it’s likely that a spouse who didn’t run up any debts could suddenly find themselves responsible for the other's credit abuse. 

Now, once again, this is challenging. You could certainly file for a joint bankruptcy before divorce to resolve the debt crisis, but as mentioned earlier, there is an income means test to qualify for a Chapter 7 “liquidation” filing. If both spouses work, their joint income could exceed the threshold. Chapter 7 is the quickest route to expunging unsecured debts such as credit cards, personal loans, medical expenses, and such. It generally only takes a few months to complete, and you’re then pretty much debt-free. 

Secured credit for cars and homes is another matter, but Texas law allows some of the most generous bankruptcy exemptions in the nation. You can basically retain a home of any value in a liquidation filing. Likewise, each family member can retain a vehicle of any value through Texas bankruptcy exemptions. 

So, if your joint income prevents a Chapter 7 liquidation petition, then divorce can help resolve the situation, since after the divorce is done, you can file separately and your income by itself may indeed qualify for Chapter 7. 

Now, if only one spouse needs to file for bankruptcy, that’s another consideration. That person’s Chapter 7 filing could be over in just a few months, eliminating debt issues that would otherwise have to be resolved during divorce. That’s another consideration when determining the timeframe of filing for bankruptcy and when to file for divorce. 

What If You File Simultaneously? 

If you file for divorce and bankruptcy at the same time, basically, the bankruptcy filing will be put on hold until the divorce process is completed and a division of assets has been established. In other words, that is probably not a good option.  

Filing for Divorce Before Bankruptcy 

This can make sense to allocate assets in advance of a bankruptcy petition, or as described above, to reduce each person’s income level below the threshold for filing a Chapter 7 petition. However, this might expose a spouse who never runs up any debts into sharing the obligation with the spendthrift spouse. 

Divorce in Texas and the Division of Assets and Debts 

A divorce in the Lone Star State starts with the principle of community property, but though this is generally a 50/50 proposition, horse-trading can take place. For instance, one spouse may give up their joint ownership in the principal residence in exchange for retaining their retirement savings or investment accounts. As long as the agreement is not one-sided, the court overseeing the case will likely agree to the settlement.  

This is what is called an uncontested divorce. In other words, the spouses forge their own agreement outside of courtroom proceedings to save the cost and time involved in battling everything out in front of a judge. If bankruptcy by either or both of the spouses is on the horizon, then that consideration can be factored into the agreement. 

Make Informed Decisions With a Bankruptcy Attorney’s Support 

If you’re considering divorce or already in the process in or around Dallas or Fort Worth, Texas, and you also need to file for bankruptcy, reach out immediately to the Hunt Law Firm. Attorney Gwendolyn E. Hunt will review your financial situation with you and advise you of the best course of action going forward.