Filing for bankruptcy can significantly affect the division of assets and debts between spouses during divorce. The “how” of this reality is guided primarily by when bankruptcy is filed in relation to when the divorce is filed, whether bankruptcy is filed jointly or by one spouse and which type of bankruptcy a single spouse or a couple chooses to file.
If bankruptcy is filed before divorce (and by both spouses), it can help streamline the division of debts and assets during the divorce proceedings. By discharging certain debts through bankruptcy, both spouses may enter the divorce with a cleaner financial slate, which could simplify property division and spousal support negotiations. With that said, bankruptcy takes time. Chapter 7 bankruptcy is generally resolved within 4-12 months, whereas Chapter 13 bankruptcy can take 3-5 years. Couples need to be on the same page about how long it will take to finalize their divorce if they opt to file for bankruptcy first.
If bankruptcy is filed before divorce by a single spouse, that can be a messy process. A judge may refuse to hear the bankruptcy case at issue until it is clear which debts and assets belong to the filing spouse and which do not. If bankruptcy is filed post-divorce, it will generally only affect the debts and assets of the individual who is filing, as a couple’s divorce settlement will already be finalized.
Property division
In Kentucky, marital property is divided according to the principle of “equitable distribution.” This means that if a court is called upon to settle a couple’s differences, their marital property and debts will be divided fairly, not necessarily equally.
If a couple moves forward with Chapter 13 bankruptcy and divorce simultaneously, their repayment plan could impact how debts are divided during the divorce, as the court may consider one spouse’s ongoing obligation to make payments as part of the settlement.
Also, the financial status of the spouse filing for bankruptcy could influence the amount of child support and/or spousal support awarded by the court. If a spouse’s financial situation is significantly impacted by bankruptcy, it may affect their ability to pay alimony or child support, which could be a consideration during divorce negotiations.
Depending on the complexity of a couple’s situation, while their divorce itself can proceed, a family court may not be able to divide marital assets or debts until their bankruptcy case is resolved. This could delay the finalization of the divorce and prolong the legal process for both spouses accordingly.