The divorce process can cause both spouses to experience financial difficulties. Finding new living arrangements and making adjustments to budgets will usually be necessary, and each spouse will need to determine how they will be able to support themselves on a single income. This process can be even more difficult if a couple has significant debts. In these cases, one or both spouses may be considering filing for bankruptcy, but when doing so, they will need to understand their options and the complications that may arise.

Chapter 7 Vs. Chapter 13 Bankruptcy and Divorce

Decisions about whether to file bankruptcy before, during, or after divorce will often depend on the type of bankruptcy a person or couple plans to pursue. While Chapter 7 bankruptcy will allow most debts to be eliminated, a couple may not qualify for this form of relief if they do not pass the means test because their combined income exceeds the median income in their area. For those who do qualify, completing a Chapter 7 bankruptcy before filing for divorce may be a good solution for addressing joint debts, and it may put both parties in a better financial position as they work to complete the divorce process. Either spouse may also choose to pursue an individual Chapter 7 case after completing their divorce.

If Chapter 7 is not an option, Chapter 13 bankruptcy may be available. In these cases, a debtor will propose a repayment plan in which he or she will make monthly payments for a period of three to five years. Because of this, Chapter 13 is usually not a good solution for spouses who are planning to get a divorce. If a couple had previously filed a joint Chapter 13 case and have a repayment plan in place, they will need to determine how to handle this plan after their divorce. In some cases, a bankruptcy may be “severed,” creating individual repayment plans for each spouse, while in others, a Chapter 13 case may be converted to a Chapter 7 bankruptcy for one or both spouses. 

If you are considering bankruptcy, you generally have two options. Chapter 7 is often the simpler option, but while it may allow a bankruptcy to be completed and debts to be eliminated within a few months, it may result in the loss of certain assets. If you want to avoid losing property such as your home, or if you are unable to pass the means test allowing you to qualify for Chapter 7, you may opt for Chapter 13 bankruptcy. In this type of bankruptcy, you will put a certain amount each month toward a repayment plan, and your unsecured debts will be discharged once the plan is complete. When planning your Chapter 13 case, it is important to understand how the amount you will pay toward your repayment plan will be determined, as well as how long these payments will last.

Calculating Disposable Income

In a Chapter 13 bankruptcy, you will be required to put your disposable income toward repaying as much of your debts as possible during your repayment plan. Your disposable income is calculated by taking your average monthly income from all sources and subtracting the following deductions:

• Housing expenses - This includes mortgage or rent expenses, as well as utilities and operating expenses. Rent, utilities, insurance, and similar expenses are usually determined based on the average expenses incurred by a family of your size in your county. However, the actual amount you put toward mortgage payments for all home loans will be used to calculate your disposable income.

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One reason that many people are hesitant to consider bankruptcy is because they do not want their credit score to be negatively affected. This score can play a significant role in your ability to obtain credit or loans in the future, so if you are planning to buy a home or car or make other large purchases, you may worry that bankruptcy will prevent you from doing so. However, if you are considering bankruptcy, it is likely that you are already encountering issues that may significantly lower your credit score, such as missed payments on credit card debts or other bills. Rather than trying to dig your way out of the hole you are in, bankruptcy can provide you with a fresh start, and while your credit score may take a hit, you can begin rebuilding your credit after wiping out some or all of your debts. 

Time Needed to Rebuild Credit After Bankruptcy

The amount of time bankruptcy will stay on your credit report will depend on the type of bankruptcy you file. Chapter 7 bankruptcy will remain on your record for 10 years, but Chapter 13 bankruptcy will only affect you for around seven years. While a bankruptcy filing may limit your opportunities to receive loans, as time passes after a bankruptcy, creditors will be less likely to see you as a risk.

To increase your credit score and make yourself more attractive to creditors, you can take a number of steps in the years following a bankruptcy, including:

For people who are struggling with debts, bankruptcy can be a good option. However, many people are hesitant to consider bankruptcy because they worry that they will lose some or all of the property they own. This is generally only true for a Chapter 7 bankruptcy, which may require some of a person’s assets to be liquidated so that as much of their debts as possible can be paid off before the debts are discharged. A Chapter 13 bankruptcy, on the other hand, will allow a person to pay off some of their debts through a repayment plan that will last several years, after which any remaining amounts they owe will be eliminated. Even if a debtor does choose to pursue a Chapter 7 case, there are a number of exemptions that will apply, and they may be able to keep most or all of their assets.

Exemptions to Liquidation in Chapter 7 Bankruptcy

If a person has lived in North Carolina for at least 730 days (two years) before filing for bankruptcy, they will be able to claim the exemptions defined in the state’s laws. These include:

• Homestead exemption - In most cases, up to $35,000 in equity in a person’s home will be exempt. However, an unmarried person who is at least 65 years old may claim up to $60,000 of a house or property that they formerly owned together with a spouse who is now deceased.

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There are many different types of debts that can cause a person or family to experience financial difficulties. In many cases, these difficulties occur because of circumstances that are out of a person’s control. For example, a person who suffers a serious injury or illness may have received multiple different forms of medical treatment, resulting in high medical bills that they are unable to pay. These problems can become even more serious if a person has been unable to work and earn enough income to cover their living expenses while also repaying the debts they owe. Fortunately, different forms of debt relief may be available, including filing for bankruptcy. Those who are considering bankruptcy will need to understand how different debts may be handled and how different types of bankruptcy may be used to provide financial relief.

Dischargeable and Non-Dischargeable Debts

Filing for bankruptcy can provide some immediate relief from debts through what is known as the “automatic stay.” After a bankruptcy petition is filed in court, this stay will go into effect, and it will prevent creditors from taking any actions to collect debts. Any foreclosure proceedings or repossessions will be halted during the bankruptcy case, and creditors will be prohibited from contacting the debtor in any way. The debtor will then be able to determine how to handle different types of debts throughout the bankruptcy process.

A Chapter 7 bankruptcy will generally allow a person to discharge their debts within a few months, and once these debts have been discharged, the debtor’s obligations to creditors will be removed. For those who do not qualify for Chapter 7 or who wish to avoid the loss of certain assets, Chapter 13 bankruptcy may be an alternative option. In this type of bankruptcy, a person’s debts will be grouped together into a three-to-five-year repayment plan, and after this plan has been completed, their remaining debts will be discharged.