Studies have shown that couples are extremely likely to divorce because of financial reasons. Aside from arguments about sex, money issues represent the number-one reason couples decide to divorce. Almost inevitably, these couples are struggling with serious debt while they are in the process of a divorce, which is why oftentimes divorce becomes bankruptcy. Credit card bills and other debts are an ever-looming presence during divorce proceedings, and they often impact the separation itself.
As all experienced divorce attorneys are aware, debts are divided between spouses during separation in a similar manner compared to assets. As these debts are divided, many spouses may come to the conclusion that it is in their best interests to declare bankruptcy. How does divorce cause these former spouses to declare bankruptcy? Why does divorce represent the “final straw” that makes their financial situation untenable? What specific situations may cause divorces to result in bankruptcy?
One or Both Spouses Was Likely Considering Bankruptcy Even Before the Divorce
Because financial strife is such a common cause for divorces, it is actually quite common for one or both spouses to consider bankruptcy before the divorce. Prior to the separation, these spouses may have been holding out until the last possible minute before declaring bankruptcy. When they face a divorce, they must attempt to deal with their financial problems with fewer assets as their property gets tied up in the proceedings. The prospect of digging themselves out of debt then becomes completely unrealistic, and they are forced to declare bankruptcy in the midst of their divorce.
Worst-Case Scenarios When Divorce Becomes Bankruptcy
One of the worst-case scenarios for a divorce is if bankruptcy causes a court order that freezes proceedings. Financial assets may be frozen completely, needlessly prolonging the divorce until after the bankruptcy is resolved. If one spouse decides to file for bankruptcy immediately before the divorce, the family house could become an asset used to help pay off their creditors. The other spouse is then left holding the proverbial “short end of the stick” with little control over what happens to their home.
Another potential scenario is when a spouse intentionally accumulates massive debt on a shared line of credit out of spite before the divorce proceedings. Bankruptcy makes both spouses liable for these debts even after the divorce is concluded, so one spouse could remain in their ex’s life to some degree (even if their ex does not want this). This type of emotional, illogical behavior is much more common than most people realize.
It May be Best to Declare Bankruptcy Before the Divorce
Due to the aforementioned concerns, most financial experts agree that it is best to declare bankruptcy before the divorce takes place. Even if a spouse believes that they may benefit from splitting their debts with their former spouse before declaring bankruptcy, it causes more hassle than it is worth. Here are some key reasons why spouses should declare bankruptcy before the divorce:
- Discharging unsecured debts improves cash flow
- Reorganizing debts makes the divorce process easier, leading to fewer disputes
- One spouse is no longer responsible for discharged debts if their partner later decides to declare individual bankruptcy
The divorce proceedings could also freeze due to a declared bankruptcy, leaving both spouses in a state of limbo until the bankruptcy is resolved. At the end of the day, most spouses simply want to move on with their lives as quickly as possible after separating.