Many couples who face divorce do so because they have been experiencing significant financial difficulties. These financial woes may be one among many factors, or perhaps the only factor, that has led to the breakdown of the marriage. These difficulties may be exacerbated by going from a dual-income household to a single-income household, perhaps due to job loss, illness, or another significant life change. When couples face these issues and decide to file for divorce, it is important to evaluate the assets, liabilities, income, and expenses of the marital estate to determine whether filing for bankruptcy can relieve one or both parties from debilitating post-divorce financial problems.

bankruptcy and collaborative process

There are several factors that need to be considered when making this evaluation. First, one must assess the liquidity of the marital estate by determining whether the marital estate has a positive net value. One must also consider the nature of the spouses’ primary assets, what percentage of the assets can be easily liquidated, and whether there are sufficient liquid assets to meet at least three months of the parties’ ordinary monthly expenses.

When assessing the nature of the assets, it is important to consider whether there any non-exempt assets, such as large amounts of cash, stocks, bonds, or expensive jewelry, that could be subject to a judgment creditor’s claims, whether one or both parties can become judgment-proof after the assets are divided, and whether one of the parties can remain liable on a debt secured by an asset awarded to the other party.

With respect to the liabilities, there are several kinds of debts to consider.  One type of debt is called a “priority debt.” Priority debts include, but are not limited to, past-due or upcoming income taxes and child or spousal support obligations. The couple may also have “secured debts” such as a house or a car that are underwater. “Unsecured debt” is another kind of debt that has no collateral secured against the debt, such as most credit cards or signature loans, with some exceptions. Has the couple had difficulty timely paying their unsecured debt? If they are timely paying on their debt, are they only paying minimum monthly payments? If the answer to any of these questions is yes, then it is likely that these issues will continue after the divorce.

If the parties struggle to pay their debts as described above, it may be worth exploring the option of one or both parties filing for bankruptcy. The purpose of bringing a bankruptcy professional into the collaborative process is to discuss how the bankruptcy process may be advantageous to resolving the financial concerns the parties may face after the divorce is finalized.

A bankruptcy professional will be able to provide additional information to the collaborative team about how the marital estate can be divided in a manner that ensures that both parties have sufficient liquidity to meet their necessary living expenses, how the community discharge may be to the parties’ advantage, the effect a bankruptcy filing may have on the ability of the parties to  meet their monthly living expenses solely on their individual post-divorce income, and how a bankruptcy will impact the parties’ ability to obtain credit in the future.

The great advantage of the collaborative process is that it allows the collaborative team to consider these issues and explore all possible resolutions. This exploration allows the team to draft an agreement that best suits the couple facing the termination of their marital relationship.

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