Bankruptcy and Divorce in New Jersey: Timing Your Filing for Better Property Division
Financial strain often accompanies divorce, adding an extra layer of complexity to an already difficult time. For some couples, the burden of shared debt can be overwhelming, and bankruptcy emerges as a viable option for dealing with those obligations. However, the timing of filing for bankruptcy—whether before or after the divorce is finalized—can significantly impact the division of assets and debts during property distribution. Understanding this interplay is essential for protecting your financial future.
The Basics of Bankruptcy and Divorce in New Jersey
Bankruptcy is a legal process designed to help individuals or couples eliminate or restructure debt under the protection of the federal bankruptcy court. Meanwhile, divorce is governed by state law, and in New Jersey, marital property is divided through equitable distribution. These two processes can intersect in complex ways, particularly when both spouses share responsibility for debts such as mortgages, credit cards, or personal loans.
Two of the most common forms of consumer bankruptcy for individuals are Chapter 7 Bankruptcy—a liquidation process that wipes out qualifying debts, often completed within a few months—and Chapter 13 Bankruptcy, which is a reorganization plan allowing debtors to catch up on arrears and repay a portion of their debts over three to five years. Deciding whether to file for Chapter 7 or Chapter 13 depends on factors such as your income, assets, and financial goals. Yet one of the most critical questions remains the timing of your filing, which can occur either before or after your divorce is finalized.
Filing for Bankruptcy Before Divorce
Filing for bankruptcy before divorce can offer several potential benefits, particularly if you and your spouse are still on relatively cooperative terms. One advantage is the possibility of joint filing, which can be more cost-effective since you would pay one set of filing fees and attorney fees for a single case, rather than two separate filings. This joint approach also allows you to discharge any eligible shared debts—such as credit card balances or medical bills—together, simplifying the property division process by reducing the overall pool of liabilities.
Another benefit of filing for Chapter 7 bankruptcy before divorce is that it can quickly eliminate unsecured debts, often within a few months. Once those debts are discharged, you’ll have a clearer understanding of the marital assets and any remaining obligations, making it easier to approach equitable distribution. However, it’s important to note that if your combined household income is too high, you may not qualify for Chapter 7 under the means test and could be forced into a Chapter 13 plan, extending your debt repayment period. This longer repayment schedule can complicate property division, as your bankruptcy case might stretch over three to five years.
Filing for bankruptcy before divorce also introduces some challenges. If you or your spouse own a home with equity or other valuable assets, the bankruptcy trustee might move to liquidate non-exempt property. This action could reduce the pool of assets available for division during the divorce. Moreover, undertaking bankruptcy and divorce at the same time can be emotionally and logistically stressful, requiring both spouses to cooperate enough to complete the bankruptcy process.
Filing for Bankruptcy After Divorce
Choosing to wait until after the divorce is finalized to file for bankruptcy can offer distinct benefits. For one, you would be filing as an individual rather than jointly, giving you full control over the process without relying on your ex-spouse’s cooperation. This may simplify determining eligibility for Chapter 7, since your income is no longer combined with your former spouse’s, and you only need to discharge your share of debts.
Another advantage to waiting is that once the divorce is complete, the property allocation is clearer. You’ll know precisely which debts and assets are yours, potentially making your bankruptcy less complicated. Additionally, many individuals find it less stressful to handle legal matters sequentially rather than simultaneously, giving them time to emotionally recover from the divorce before tackling financial restructuring.
However, there are drawbacks to filing post-divorce. If both spouses ultimately require bankruptcy relief, separate filings mean higher overall costs in legal fees and filing fees. Also, if your ex-spouse fails to pay debts they were assigned in the divorce decree, creditors might still pursue you if you co-signed, forcing you to address leftover joint debts that negatively affect your credit. Finally, the delay in filing can lead to increasing financial pressure if you were counting on a bankruptcy discharge to alleviate debts and missed payments.
Impact on Property Division
In New Jersey, equitable distribution aims to divide marital assets and liabilities fairly but not necessarily equally. The timing of bankruptcy intersects with this principle in different ways depending on whether you file before or after your divorce.
If you file before the divorce, unsecured debts can be discharged early, reducing the overall liabilities subject to division. However, the bankruptcy trustee may liquidate non-exempt assets to satisfy creditors, leaving fewer assets to distribute in the divorce. On the other hand, if you file after the divorce, your divorce decree will outline who is responsible for specific debts. Nevertheless, creditors can still come after you if your ex-spouse fails to pay their assigned obligations and you co-signed those debts. Filing for bankruptcy individually can help you discharge your liability, but it won’t shield you from any immediate effects if creditors choose to pursue you first.
A home is often a major concern in both divorce and bankruptcy. If neither spouse can afford the mortgage alone, or if arrears are piling up, a Chapter 13 plan might help catch up on missed payments. Alternatively, if you both opt to sell the home, eliminating mortgage debt through a joint bankruptcy before the divorce might be the better path.
Working with a New Jersey Divorce and Bankruptcy Attorney
Handling divorce and bankruptcy can be complicated enough on their own; combining them multiplies the complexities. A skilled attorney who understands both state divorce laws and federal bankruptcy laws can be invaluable for protecting your rights and assets. Professional legal assistance includes evaluating your financial situation to determine whether Chapter 7, Chapter 13, or another approach fits best, and coordinating property division so that any exemption or liquidation actions by the trustee do not unintentionally affect your divorce settlement.
An attorney will help you draft a strategic plan, whether you decide to file jointly before your divorce or as an individual afterward. This often involves negotiating with your ex-spouse, establishing clear repayment schedules if you choose Chapter 13, or preparing for a possible liquidation of non-exempt property under Chapter 7. By having one legal team manage both your divorce and bankruptcy, you can reduce duplication of efforts, minimize conflicts, and ensure a more streamlined process.
Take the Next Step
Divorce and bankruptcy each introduce significant upheaval into one’s life. When these legal processes overlap, the stakes and complexities multiply. With careful planning and the assistance of an experienced New Jersey divorce and bankruptcy attorney, you can create a strategy that safeguards your assets, manages your debts effectively, and aligns with your future objectives.
Navigating divorce and bankruptcy can be daunting, but you don’t have to face it alone. At Hoffman Family Law, we’re committed to helping you make informed choices that secure your financial stability and protect what matters most. If you’re considering bankruptcy before or after your divorce—or simply want to explore your options—our experienced team is here to guide you every step of the way. Contact us today and take the first step toward a confident, debt-free future.
