Bankruptcy And Divorce in Tennessee: What You Should Know
Divorce is tough on its own, and adding bankruptcy can make things even harder. If you’re dealing with divorce and bankruptcy in Tennessee, knowing how these processes work together can help you make better, informed choices about timing, protecting your assets, and planning for your financial future.
How bankruptcy and divorce impact each other
Bankruptcy and divorce both deal with finances, but they’re handled in different courts and follow different rules. Bankruptcy is managed in federal court. Divorce, on the other hand, is managed in the Tennessee state court. When these cases occur simultaneously, they can affect each other and require careful planning.
Filing for bankruptcy along with filing for divorce can affect your assets, debts, and ultimately, the outcomes of both cases. In Tennessee, married couples can file for bankruptcy together or separately. Each choice has its own factors to consider during a divorce.
Filing for bankruptcy before divorce
Some couples choose to file for bankruptcy together before getting divorced. Doing so may have several benefits. A joint Chapter 7 bankruptcy usually takes between 3 and 6 months.
Benefits of filing jointly
Filing for Chapter 7 bankruptcy together can save money compared to filing alone and may also allow spouses to use exemptions more effectively. Getting rid of shared debts first can also make dividing property easier and can help avoid arguments over who pays which debts. This way, both spouses can begin their new lives with fewer financial burdens.
Challenges to consider
Filing for bankruptcy before divorce means both spouses need to work together. They must agree to file jointly, complete the paperwork, and attend the 341 meeting of creditors. If the relationship is too strained, this may be impossible.
Filing for bankruptcy during divorce proceedings
Filing for bankruptcy triggers an automatic stay, but a divorce can usually proceed as to dissolution and family-related issues, while property division involving the bankruptcy estate is typically paused unless the bankruptcy court allows it. The main area that may be paused is the division of marital property that is part of the bankruptcy estate, unless the bankruptcy court grants relief from the stay. The stay is intended to protect the bankruptcy estate while the bankruptcy trustee sorts and distributes assets.
In the meantime, the divorce court must wait to divide property and debts unless the bankruptcy court either ends the stay or grants permission for the divorce court to proceed. This delay can help if you need more time to sort out your finances before finishing the divorce. However, it can also be frustrating if you want to move on quickly.
Exceptions to the automatic stay
Federal bankruptcy law allows select divorce issues to continue even during an automatic stay. This might include custody, parenting time, child support, and alimony. These exceptions are in place to ensure that critical family matters, including those involving children, aren’t delayed. Property division involving the bankruptcy estate generally remains paused unless the bankruptcy court grants relief.
Filing for bankruptcy after divorce
Many people decide to wait to file for bankruptcy until after their divorce is final. This lets you finish the divorce without dealing with the automatic stay, and you can handle your own finances once the assets and debts are divided.
Which divorce obligations can be discharged?
A central issue in filing for bankruptcy post-divorce is which debts can and cannot be wiped out. Bankruptcy law states that some divorce-related obligations aren’t able to be erased. For example:
- Child support payments must continue regardless of bankruptcy.
- Alimony and spousal maintenance remain a responsibility.
- Some property settlement debts may be dischargeable under Chapter 13 but not under Chapter 7.
Knowing which debts remain after bankruptcy is essential when planning your finances after divorce. If your divorce agreement says you must pay your ex for their share of property or take on certain debts, Chapter 13 bankruptcy might help you manage those responsibilities.
Chapter 7 vs. Chapter 13 bankruptcy in divorces
The kind of bankruptcy you choose is very important if you’re getting divorced. Knowing the differences between bankruptcy chapters can be helpful in picking the best option for your situation.
Chapter 7 bankruptcy
Chapter 7 may involve the sale of non-exempt assets to pay creditors, though many cases involve no asset liquidation due to exemptions. Usually, it clears most unsecured debts within a few months. Within certain limits, Tennessee exemptions can protect equity in your home and personal property, including your vehicle, up to statutory limits.
Chapter 13 bankruptcy
Chapter 13 works considerably differently from Chapter 7, as you may keep your property, but must make monthly payments to the bankruptcy trustee based on your income. The repayment plan commonly lasts 3 to 5 years. Chapter 13 is beneficial if you have assets you want to keep or if you’re behind on payments, like your mortgage or car loan.
For people going through a divorce, Chapter 13 has the unique benefit of possibly allowing discharge of certain non-support property settlement debts if the repayment plan is successfully completed. For those who have been given large debts in their divorce, this benefit is substantial.
Business bankruptcy considerations
If you or your spouse owns a business, bankruptcy in conjunction with divorce can be even more complex. Business bankruptcy can impact how marital property is divided, particularly if the company is counted as a marital asset in the divorce.
In Tennessee, marital property covers assets gained during the marriage, which can include business interests. The kind of business you have also matters. For instance:
- Sole proprietorships. There is no legal distinction between personal debts and business debts.
- Corporations and LLCs. The business may need to file for bankruptcy separately.
- Partnerships. Your interest in the partnership becomes part of your bankruptcy estate.
The way your business is set up decides how it will be handled in bankruptcy.
Protecting your interests
No matter when you’re thinking about bankruptcy, whether it be before, during, or after divorce, it’s important to talk to lawyers who know both areas of the law. Since these legal processes are connected, careful planning can go a long way in helping protect your finances.
When making decisions about bankruptcy timing, you should consider the following factors:
- The amount and type of debt you’re carrying
- Which spouse is responsible for specific obligations
- The value of marital assets and how they’ll be divided
- Your current and expected future income
- Tennessee’s exemption laws and how they apply to your property
All these factors can strongly affect whether you should file for bankruptcy or divorce first, as well as which type of bankruptcy is best for your situation.
Contact your Tennessee legal team
It’s an understatement to say that handling bankruptcy and divorce at the same time can be taxing. Due to the intricate interaction between federal bankruptcy law and Tennessee divorce law, legal representation is crucial to protect your rights and finances.
At Graham Law & Associates, we know Tennessee law and can help create a plan for both processes. Reach out to us today so we can discuss your situation and explore the options available to you.