If you and your California spouse are contemplating divorce and have a significant amount of debt, the timing of your bankruptcy filing can affect your divorce negotiations. If you and your spouse agree on a course of action, you can realize additional financial benefits and ease the process.
File bankruptcy before divorce
When to file for bankruptcy depends on your circumstances. Filing for Chapter 7 with your spouse before divorce can allow you to benefit from larger exemptions and wipe out a significant portion of marital debt. Note that if you file for bankruptcy and then for divorce, the latter will incur an automatic stay until the bankruptcy is finalized. An automatic stay also applies to Chapter 13 bankruptcy, a longer and more complicated process. If you decide to file for Chapter 13 to protect a specific asset like a house, decide before filing if that asset is worth the emotional delay of the divorce. Weigh your options carefully when filing bankruptcy before or after your divorce is finalized.
Debts that can’t be discharged
Although bankruptcy can discharge a significant portion of your debt, not all categories will qualify. The U.S. Bankruptcy Code indicates which types don’t apply. These debts include some taxes, child support and alimony payments. Your divorce decree may also require you to pay some marital debts, even if bankruptcy has discharged them.
Navigating life after bankruptcy
Divorce and bankruptcy often go hand in hand, as does the navigation of life after a Chapter 7 or Chapter 13 filing. Bankruptcy starts a new life, so you must consider which filing type best meets your needs. One of the first benefits is that creditor harassment will stop as soon as you file. This can ease the stress in any divorce situation.
With a bankruptcy filing, you can rebuild your credit much more quickly than you may think. Your credit score will rebound within a few years, and if you wish to buy another home, you may be able to do so within two to five years thanks to a lack of debt.