Bankruptcy allows a debtor to eliminate (“discharge”) certain debts and obtain a fresh financial start. Many people file for bankruptcy following a divorce, which is an excellent move when their debts are primarily unsecured debts, like credit card balances, personal loans, or medical debt.
To best understand your options, our Ohio divorce lawyer presents the following preliminary considerations. It is vital that you file for the correct bankruptcy at the right time to garner the maximum benefit.
Two Types of Bankruptcy
The typical consumer will choose to file either Chapter 7 or Chapter 13. They are very different:
- In a Chapter 7, a debtor can discharge qualifying debts in a few months from start to finish. However, the trustee can take any non-exempt property and give it to your creditors.
- In a Chapter 13, the debtor doesn’t lose any property. However, he or she must make payments on a plan that lasts 3-5 years.
Some people will qualify for either; however, Chapter 7 has a means test. You will pass the test if your income is below the state’s median for a family of your size. Other people can pass the means test if they have large expenses.
Instead of rushing off and filing bankruptcy, you should review which one is best for you. This largely depends on the amount of property you will get out of your divorce. It is possible that many of your assets will not be exempted.
Discharging Qualifying Debts
Before you can decide to even file for bankruptcy, you need to understand which debts can be eliminated. Bankruptcy cannot eliminate every debt.
For example, secured debts are not dischargeable. This means that you cannot eliminate your mortgage, since the security interest in your property survives the discharge and the lender can foreclose on you. Other secured debts include car loans. Even though you can’t discharge these debts, you might be able to spread any overdue payments over the course of a Chapter 13 repayment plan, which gives you extra time to catch up.
The best debts to eliminate are unsecured debts, including credit card debt, medical debt, and personal loans. Sometimes, court judgments against you can also be eliminated.
You must sit down with an attorney and identify whether you are truly responsible for the debt. In a divorce decree, a judge might allocate to one spouse responsibility for paying a debt. However, what’s key is whose name is on the loan document. A judge might have assigned $10,000 in car payments to you even though you never signed or co-signed for the loan.
Discharging Family Law Obligations
In the typical divorce, a judge enters an order for child support and possibly spousal support. The judge also divides the marital property equitably, which might include requiring one spouse to make a payment to the other. These types of orders are treated differently in bankruptcy.
First, family law obligations like child support and spousal support are not eliminated in either bankruptcy. You must still pay them. You are also responsible for any unpaid amounts (called arrearages). Neither a Chapter 7 nor a Chapter 13 will eliminate them.
However, you might be able to spread out arrearages in a Chapter 13. So long as you keep up with your monthly payments, you can also avoid any collection action against you.
A property settlement agreement is different. You might be able to eliminate some of it if you complete a Chapter 13 repayment plan. Because every case is different, it is best to discuss this consideration with a lawyer.
Identify the Correct Time to File
You might be eager to file immediately after getting divorced, but you still need to consider the correct timing. It is very expensive to support yourself after getting divorced, and you might need to take out a loan or use your credit cards to tide you over until your finances stabilize.
However, once you file for bankruptcy, you can expect all credit cards to be frozen. You also won’t be able to get new debt for a while (usually several years). Consequently, you don’t want to file too soon. You also don’t want to file too late. This is where an experienced Ohio divorce lawyer is a terrific asset.
When you meet, go over your current debt obligations as well as your finances. Your lawyer might advise you to wait until you get a full-time job. Or your lawyer might agree that now is the time to file. Once you file, however, you must wait several years before you can file again.
Contact Us Today
Lawrence Law Office understands the financial stress that many men and women are going through. We are prepared to discuss bankruptcy as a sensible option if you contact us today. We offer confidential consultations at a convenient time.