California residents that are preparing to file for divorce and bankruptcy may wonder what the potential benefits are depending on which one should be filed first. Some experts would recommend filing for bankruptcy prior to divorce.
Filing for bankruptcy can help resolve certain issues before the divorce is filed. It can also help avoid a situation where divorce issues impact the bankruptcy proceeding. Filing for Chapter 7 can allow a person to wipe out liability for outstanding debts before the divorce begins. The spouse would be able to agree to accept responsibility for joint debts during the divorce, but would not be required to do so by the creditors. That means that a spouse who files for bankruptcy before filing for divorce may be able to avoid liability for joint debts. Conversely, if a person files for divorce and agrees to pay a portion of jointly held debts during property division, bankruptcy cannot supersede that agreement. The other spouse could still require the spouse to pay pursuant to the agreement, even if the creditor could not sue that person directly.
California law does not allow a creditor to sue a person for discharged debts following a foreclosure, if the loan was given to secure the purchase of a person’s primary residence. Thus, people who are considering bankruptcy as an alternative to foreclosure may not be responsible for the debts they are trying to discharge.
A local attorney may be able to review mortgage documents to determine whether a person would be liable for them following foreclosure. It may then be possible to decide whether bankruptcy is the best solution. Once a plan of action is established, a local attorney may be able to assist with filing for bankruptcy and divorce.
Source: Fox Business, “Which Should I File First: Divorce or Bankruptcy?“, Justin Harelik, July 10, 2013