If you find yourself in the position of considering a divorce and also needing to file for bankruptcy you may be wondering what your options are. Are you required to file for bankruptcy as a married couple? Can you be saddled with debt accrued by your soon to be ex? Are assets you came into the marriage with at risk?

Or maybe your marriage is solid and your finances are nothing to worry about, at least not yet. You’ve heard that Wisconsin is a community property state, meaning all assets and debts acquired during the marriage are considered equally co-owned by both spouses, generally speaking. This has you worrying about how you protect yourself and your assets in the event your marriage, or a future marriage, were to fail with bankruptcy issues at play.

Can I Protect My Assets from Bankruptcy and Divorce Before There is a Problem?

The short answer is yes. A family law attorney can help you draft a prenuptial or postnuptial agreement. These agreements can separate assets from the communal property. In Wisconsin, prenuptial and postnuptial agreements are permitted to address the allocation of debts. This is most commonly seen with debts such as student loans or credit cards. This method can be used to prevent one spouse from being encumbered by the other’s spending. It is important to note that if there is a prenuptial or postnuptial agreement, creditors are entitled to notice of such agreements. Failure to notify the creditors can result in the protection being voided.

As beneficial as a prenuptial or postnuptial agreement can be, many couples choose not to pre-plan for the possibility of a breakup. For those who are navigating the breakdown of a marriage and a mountain of debt, the question then becomes what impact do bankruptcy and divorce have on each other in Wisconsin?

Understanding Bankruptcy

If you are considering bankruptcy it is important for you and your spouse to sit down and undertake a thorough review of your joint finances, including assets, property, and debt. You also should familiarize yourself with the two types of bankruptcy, Chapter 7 Bankruptcy and Chapter 13 Bankruptcy.

Chapter 7 Bankruptcy is the faster of the two options, usually taking between three to six months to complete. This is known as the clean slate bankruptcy, allowing the person to have a fresh start. However, not everyone is eligible for Chapter 7 Bankruptcy. Income limitations require that your income cannot exceed the median income for a household of your size in the state of Wisconsin. For a household of two, that number is $87,938. Where Chapter 7 is filed after a divorce, the court will only look at your salary after the divorce when determining eligibility.

Chapter 13 is a much longer process by contrast, usually involving a payment plan that can take between three to five years to complete. However, if your income exceeds the median income for your household’s size, then this is your only bankruptcy option. Because of the length of time required with the repayment plans, filing for Chapter 13 Bankruptcy may result in prolonged financial ties to your spouse.

There are limits to what bankruptcy can do. While bankruptcy can discharge property settlements and attorney’s fees not associated with actions for support, bankruptcy does not remove the obligation to pay alimony or child support. While these obligations cannot be discharged, they can be affected by how much the former spouse is able to pay and the payment plan established by the bankruptcy court. Just as there are pros and cons to the two types of bankruptcy there are advantages and disadvantages to filing for bankruptcy before or after divorce.

Filing For Bankruptcy Before Divorce:

• You may be able to double your exemptions by filing jointly with your spouse.
• Discharging debts can simplify the division of assets during a divorce reducing the cost and time of obtaining a divorce.
• By filing for bankruptcy before divorce you may be able to avoid liability for marital debts.
• A single filing as a joint couple may save you costs.
• Filing for bankruptcy puts an automatic freeze on assets and property, staying creditors.
• Can work if you are amicable with your soon to be ex spouse.
• Your joint income may make you ineligible for Chapter 7.

Filing For Divorce Before Bankruptcy:

• If your income as a joint household precludes you from filing for Chapter 7 bankruptcy but your individual salary is below the median threshold, then filing for bankruptcy before divorce may be a better option.
• May be better for couples who own a lot of property because of the number of exemptions allowed for joint filings.
• It may be better if you and your spouse are acrimonious.
• The divorce can be stayed by a bankruptcy filing. If one spouse files for bankruptcy after a divorce has been filed but before the divorce is granted, the divorce court must put the divorce proceedings on hold until the bankruptcy is resolved. Thus the other spouse can force the bankruptcy to take place before the divorce unless the bankruptcy court permits the divorce to move forward.
• If a divorce is completed prior to filing for bankruptcy, the divorce decree should address bankruptcy issues to prevent one spouse from being held responsible for the other spouse’s debt. This is important because a creditor can still collect from a spouse even if a divorce decree dissolves that spouse of any debt obligation. For example, in the divorce decree the ex-husband is responsible for the debt on his vehicle. The ex-husband defaults on the vehicle and the creditor collects the money from the ex-wife. This now creates a situation where the ex-wife would need to incur the time and cost of suing her ex-husband to recover the money taken from her to cover the debt the divorce court ordered him responsible for.

Contact the Divorce and Bankruptcy Attorneys at Muter Law Office for Guidance

The need to file for bankruptcy complicates the divorce process and can have long lasting and potentially devastating financial impact. Having attorneys who specialize in Wisconsin Divorce Law and Bankruptcy is key to successfully navigating this tricky legal minefield. Muter Law Office offers practical, cost-effective solutions to help those planning for the what ifs in life with prenuptial and postnuptial agreements, as well as the skill and expertise to guide you if the worst case scenario should occur. Contact the Muter Law Office today to schedule a free and confidential appointment to discuss your situation and how we can assist you.