Often, divorce precedes bankruptcy, and is, in fact the “last straw” that pushes an individual into bankruptcy. While in many cases the financial hardships caused by divorce are legitimate, prior to the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 bankruptcy was often used as a way to completely sever ties with an ex-spouse and avoid financial obligations.

Couples contemplating both bankruptcy and divorce should probably complete the divorce prior to the bankruptcy rather than wait until later. They will not be allowed to proceed with both at the same time.

One reason why couples should divorce first and file second is that their financial status will be clear from the outset. They may be allowed to file Chapter 7 rather than Chapter 13.

Chapter 13 is a bankruptcy that includes a repayment plan of some or all of a person’s debt over a three to five year period. It is generally chosen in order to save a valuable asset – such as the family home. In some cases it is the only option available because a couple’s income is too high to qualify for Chapter 7.

If you have already filed Chapter 13, your divorce could permit you to alter the terms of your bankruptcy and allow you a lower payment or even a grace period with no payments while you work things out. It could also qualify you to convert to Chapter 7 – in which all debt is wiped out.

Any change in financial circumstances can grant you this leeway. Other instances could be loss of employment or illness.

The important thing to remember is to notify your trustee immediately – especially if the pending divorce means you don’t have the money to make the scheduled Chapter 13 payment. Whatever you do, don’t just ignore the payment without first notifying the trustee of the reason.

In order to have your case reviewed and possibly alter the terms of your bankruptcy you will have to file appropriate documents, which include proof that one party has moved out and is paying rent and/or utility bills at another location. So it is important to determine that the divorce really will take place and you really will be maintaining separate households.

The increased household expense would be the determining factor in deciding whether the bankruptcy terms can be altered.

Author: Mike Clover
CreditScoreQuick.com

Fact: Not everyone who files for bankruptcy does so because they’ve been irresponsible.

The vast majority of bankruptcy filings occur as a result of illness, death of a provider, job loss, business failure, divorce, or some combination of life-altering events that the consumer certainly didn’t plan for. Irresponsibility accounts for only a fraction of the filings.

Between 1.2 and 1.5 million Americans use the bankruptcy courts each year to get out from under unmanageable debt.

Thus, you need not feel hesitant or ashamed if this is the right option for you.

The primary drawback is that filing for bankruptcy is expensive. It not only costs money to file, but it negatively affects your ability to borrow – and the interest rates you’ll pay if you do borrow – for the next 7 to 10 years.

Consumers have two options: Chapter 7 and Chapter 13.

Under a Chapter 7 filing, consumers walk out of the courtroom debt free. In order to qualify, however, those consumers must have a modest or limited income.

Those wishing to file for Chapter 7 must provide:
1. A list of all creditors and the amount and nature of their claims;
2. The source, amount, and frequency of the debtor’s income;
3. A list of all of the debtor’s property; and
4. A detailed list of the debtor’s monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.

In addition, he or she must provide a list of “exempt” property, because the bankruptcy trustee will dispose of all non-exempt property and use the proceeds to pay debtors. The definition of exempt property varies from state to state, and there is a Federal list as well. Debtors can choose to use the list most favorable to them.

Chapter 13, also known as the “Wage earner plan,” is actually a debt consolidation program based on the consumer’s ability to repay debt. Payments are made to a trustee, who then distributes funds to creditors.

Depending upon the consumer’s income, these payments are set for 3 to 5 years, after which time the bankruptcy will be discharged. Creditors may or may not have been paid in full.

Under the terms of Chapter 13, consumers must live on a limited budget and contribute all “disposable income” to the repayment plan. A “Hardship Discharge” may be granted in the event the wage earner is no longer able to work as a result of illness or accident.

Both plans require the consumer to complete a course of financial/credit counseling. Both types also negatively affect your credit scores. Bankruptcy remains on your credit report for 10 years.

A debt, once discharged through bankruptcy, is no longer owed. However, the consumer going through bankruptcy can ask that some debts, such as a car loan or other secured debt, be reaffirmed. Some debtors, wishing to maintain a relationship with a credit card issuer – such as a credit union – will also ask to reaffirm that debt.

This is done through a specific, court-approved agreement. By reaffirming, the debtor becomes legally obligated to pay all or part of an otherwise dischargeable debt.

If this is done through the court system, your subsequent good payment record on that debt will be reported to the credit bureaus and you will “get credit” for on-time payments and begin to rebuild your credit scores.

Unfortunately for some debtors, the urge to repay certain debts because of a moral obligation remains strong. Following that urge, they begin making payments on a debt that has been discharged – believing that any time they are unable to make payments it won’t matter, because they no longer legally owe the debt.

This is not the case, and there are two good reasons for not resuming payment.
• Your payments will probably not be reported to the credit bureaus, so they will not help you rebuild your credit scores.
• The act of making payments on a debt constitutes an informal reaffirmation of the debt – thus the obligation shifts from one of personal morality back to legal obligation.

Moral obligation is also an effective tool used by unsavory debt collection agencies to collect on debt that has been discharged in bankruptcy and/or debt that has become uncollectible through the statute of limitations. (These predators also use morality to coerce family members into paying debts for the deceased.)

This claim, however, is false. No matter what moral obligation you may have felt toward your original creditor, you have no moral obligation to a collection agency that has purchased that debt for pennies on the dollar in the hope of getting you to repay their investment many times over.

The telephone solicitors they hire are very good at what they do – and are often able to convince people, either through obligation or fear, to make a payment. This is the worst thing they could do, because it not only informally reaffirms the debt, it resets the statute of limitations.

Under the statute of limitations, a creditor is no longer allowed to sue for collection after a set period of time – typically 4 years from the last payment or your last use of credit.

That legality does not stop collection agencies from filing suit against you, failing to serve you with court papers, and gaining a judgment – even on a debt that was discharged 20 years earlier. Remember – these agencies pose as legitimate business, but actually operate as crooks.

Should this happen to you, you’ll need to contact the credit bureaus with proof that the debt was discharged in bankruptcy.