Although bankruptcy can help with a divorce by simplifying issues of marital debt, it can be rather disruptive if it is done without planning. If you are coordinating a bankruptcy into an expected or ongoing divorce action that is one thing; it is quite another if it happens without warning after the bankruptcy has been filed.
If you are in a chapter 7, then the impact is not as great. These bankruptcies in New Jersey are resolved about four months from their filing, and unless issues of equitable distribution are resolved within six months of your bankruptcy case ending, the divorce will most likely not disrupt your bankruptcy or change its outcome.
Issues in a Chapter 13
Problems arise, however, if you are in a chapter 13. This is because you are in an ongoing case that can last anywhere from three to five years based on anticipated income and expense levels. A divorce filed during it can be quite disruptive because
- The income situation changes. Your spouse moves out and has his or her own living expenses to pay. Although some, like food and clothing, may stay the same, others, like housing and utilities, can increase. These expenses will be paid either by that spouse’s income or by spousal support sought from you during the pendency of the divorce.
- The goals of the bankruptcy may no longer be reachable. If the purpose of the bankruptcy was to save the marital home from foreclosure, this could put that marital asset into serious jeopardy.
- New debts can arise for you and your spouse as you hire (and pay for) attorneys to represent you in the divorce action.
As you can see, an unplanned divorce filing can cause some serious problems.
So What Do I Do?
So what do you do if this should happen? Can the bankruptcy be saved, and can the goals it had when it was filed still be met? Well, I have several suggestions depending on your situation.
- If you are trying to save the marital home and you are not too far away from the completion of the plan, you can just tough it out until then. Couples often “stay together for the kids”; you can stay together for the house! Get the mortgage brought current, so that this marital asset can be saved (or some other important goal of the plan is reached).
- If you think the economic disruption from the divorce filing might be short term, you can petition the court to suspend plan payments for a certain number of months (as long as you can meet all other financial obligations, and you can still meet plan goals like saving the home once payments resume).
- If your change in income and expenses is so drastic as not to eliminate all disposable income for a plan payment, and your goal can still be reached by a lower payment, you can petition the court to modify your repayment plan to reflect your new economic reality post divorce filing.
- If you do not see being able to make a plan payment at all in the foreseeable future, and your plan only addresses debts like credit cards or you are resigned to losing the home or some other goal, you can convert to a chapter 7 to discharge your debt and still get a fresh start.
Naturally, you should consult with your bankruptcy attorney on which option is best for you under your circumstances. But this should be done as soon as possible and in concert with your bankruptcy attorney.
For more discussion of this topic, check out my podcast on Bankruptcy Strategies in Divorce. You can also get more information about bankruptcy and divorce by downloading my free book, Top Questions Divorcing Couples Ask About NJ Bankruptcy.
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