Rarely should a couple consider filing bankruptcy together. It takes a combination of circumstances, and independent legal advice, to do so.
Last time we talked about filing a joint Chapter 7 case with your soon-to-be ex-spouse if that is in each of your self-interest. That means, for each of you, it’s in your best interest to file:
a Chapter 7 case
at the same point in time
before the divorce case instead of after
Let’s look at these one at a time.
1. Chapter 7 Is Best for Both
Whether or not to file bankruptcy is a big decision.
Then, deciding between Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” is a big decision. (Or, rarely, Chapter 11 if you own a larger business or have an unusually huge amount of debts. Or Chapter 12 if you own a farming or fishing business.)
For each spouse Chapter 7 must be the best option for him or her.
There are situations in which only one person needs to file bankruptcy. One person may be the only one liable on all the debts, or on all the troublesome debts. The other person may not need debt relief. Then, joining in the Chapter 7 case may be detrimental to him or her.
There are situations in which both needs bankruptcy but one needs Chapter 7 and the other Chapter 13 relief.
However, sometimes both spouses need bankruptcy relief and both need a Chapter 7 case. This is in fact a common situation. Most of the time both spouses are jointly liable on most of the debts, or enough of them that both need relief.
Chapter 7 is often the better tool for both of them. Chapter 13 is generally a longer term solution. A couple contemplating divorce more likely needs an immediate solution—clean up their finances, get divorced, and move on with life.
2. Filing Jointly Is Best for Both
The advantages of filing jointly are cost and convenience.
You pay one set of bankruptcy court filing fees and attorney fees instead of two. The court filing fee is the same for individual and joint cases. And attorneys usually does not charge more, or only a little more, for a joint case. So essentially it costs half as much to file a joint case than two separate ones. When money is extremely tight, that sensibly makes filing jointly attractive.
The convenience is in saving time by going through one case instead of two (assuming both are filing). If the spouses continue to be in a reasonably calm and cooperating relationship, they can help each other find a good bankruptcy lawyer, work with him or her in preparing the documents, attending the “meeting of creditors,” and do whatever is needed to complete their case successfully.
But these same hoped-for advantages could easily turn into disadvantages.
First, if the two spouses begin not cooperating well with each other, a joint filing could be much less convenient. The uncooperative spouse could slow the whole process down, sometimes to the significant detriment of the other. The documents could be inaccurately completed, potentially jeopardizing the entire case.
Second, the lack of good communication between the spouses could add to the cost. If any debts are not originally included in the original documents, adding them later costs more money. There are various other adjustment like this that could increase the cost, reducing the cost advantage to filing jointly.
3. Both Need to File Bankruptcy at the Same Time
Often the timing of the filing of a Chapter 7 case is very important. It affects what debts and assets are included and what happens to them, among many other things.
One spouse may benefit from filing the case at one point in time, the other from filing some other time. The benefit of each person being able to file when it’s best for that person may be reason enough not to file jointly.
4. Filing Before Divorce Best for Both
Sometimes one spouse would benefit from filing bankruptcy before divorce, while the other would benefit from filing after. This is usually because of the shift in assets and/or debts that happens during the divorce. But it can be because of many other reasons. The person who would benefit from filing bankruptcy after the divorce obviously shouldn’t be filing a joint bankruptcy beforehand.
Spouses MUST Get Separate Advise from Separate Lawyers
There is only one way to find out the answers to the above four issues. You each need to get advice about whether bankruptcy is in your best interest, whether Chapter 7 is the best option, when is the best time to file, and whether filing before or after the divorce is better for you. And that advice should be from separate lawyers representing each of you independently
Lawyers are ethically not allowed to represent two parties who have a legal conflict of interest. Any two spouses often have legal conflicts of interest. That’s much more likely if they’re on the way to getting divorced.
Lawyers also have an obligation to preserve clients’ confidences, and to advocate on behalf of their clients. There is a serious doubt whether a single lawyer could fulfill these obligations with spouses intending to divorce.
Cut through all these problems by getting independent legal advice about each of your options. Then, if you end up in agreement on the above four issues, it may make sense to file Chapter 7 together.