Chapter 7 or Chapter 13: Choosing the Best Bankruptcy Option When Divorce Is on the Horizon
When a marriage is coming to an end, the emotional toll is often compounded by financial stress. Divorce itself can create economic strain, and for many couples in Los Angeles, overwhelming debt makes the process even more difficult. In some cases, filing for bankruptcy before, during, or after divorce can be a necessary step toward financial stability.
The critical question for divorcing spouses is which form of bankruptcy, Chapter 7 or Chapter 13, offers the most appropriate path forward. Each chapter has unique requirements and consequences that can impact not only personal finances but also how property is divided in divorce. Understanding these distinctions can help couples and individuals make choices that protect their financial future.
Understanding Chapter 7 and Chapter 13
When considering bankruptcy during or before divorce, the two most common options are Chapter 7 and Chapter 13. Each works differently and can have very different effects on your property, your debts, and the overall timing of your divorce.
Chapter 7, commonly referred to as “liquidation bankruptcy,” allows a debtor to discharge most unsecured debts, such as credit card balances and medical bills, relatively quickly. In exchange, a bankruptcy trustee may sell non-exempt assets to repay creditors. Many people who qualify for Chapter 7 keep most, if not all, of their property due to exemptions under California law, but this depends on the individual’s financial circumstances.
Chapter 13, often called a “wage earner’s plan,” does not involve liquidation. Instead, it allows individuals with regular income to create a repayment plan lasting three to five years. During this period, they make monthly payments to creditors based on their disposable income. Chapter 13 is often used by individuals who want to protect assets such as a home or vehicle while catching up on overdue payments.
Timing Bankruptcy and Divorce
Deciding whether to file for bankruptcy before or after divorce can be as important as choosing between Chapter 7 and Chapter 13. For some couples, a joint bankruptcy filing before divorce makes sense, as it can eliminate much of their unsecured debt and simplify the division of assets and obligations. However, this is only practical if both spouses are willing to cooperate.
Working with experienced Los Angeles bankruptcy attorneys can help couples evaluate whether bankruptcy should come before or after the divorce petition is filed. The right timing can prevent unnecessary delays in family court and reduce long-term financial complications for both spouses.
If divorce proceedings are already underway and one spouse files individually, the bankruptcy will trigger an automatic stay. This stay may temporarily halt property division in family court. The type of bankruptcy chosen, Chapter 7 with its shorter timeline or Chapter 13 with its longer repayment period, directly affects how long the divorce case might be delayed.
When Chapter 7 Makes Sense During Divorce
Chapter 7 can be advantageous for divorcing spouses who:
- Have primarily unsecured debts such as credit cards, medical bills, or personal loans that they want discharged quickly.
- Own little non-exempt property, meaning they will not risk losing significant assets to liquidation.
- Need a faster resolution so divorce proceedings can move forward without years of delay.
Because Chapter 7 cases usually conclude within a few months, they minimize disruption to divorce litigation. By clearing unsecured debts first, spouses may find it easier to negotiate property settlements and support arrangements. However, if a couple owns substantial property beyond California’s exemptions, the trustee may sell assets, which can complicate the division process.
When Chapter 13 May Be the Right Choice
Chapter 13 is often more suitable for individuals who:
- Have significant secured debts, such as mortgages or car loans, and want to avoid foreclosure or repossession.
- Need time to catch up on arrears while keeping valuable property intact.
- Have income too high to qualify for Chapter 7 under the means test.
While Chapter 13 offers powerful protections for assets, it requires years of repayment. For divorcing spouses, this can mean prolonged entanglement with their ex-partner’s financial obligations if they file jointly. On the other hand, if one spouse files individually, Chapter 13 may provide a structured way to preserve property for themselves and their children during and after divorce.
Which Divorce Debts Can Bankruptcy Erase?
Not all debts are treated equally in bankruptcy, especially when divorce is involved. Some obligations, like child support and spousal support, cannot be discharged under either Chapter 7 or Chapter 13. These debts remain in place no matter what type of bankruptcy is filed.
Property settlement obligations, however, may be treated differently depending on the chapter. In Chapter 7, most divorce-related property settlement debts cannot be discharged, meaning a spouse remains responsible for them. Under Chapter 13, certain property settlement obligations may be dischargeable once the repayment plan is completed. This distinction can have major implications for divorcing spouses negotiating who will take on which debts.
How to Decide Between Chapter 7 and Chapter 13
There is no one-size-fits-all answer to whether Chapter 7 or Chapter 13 is better when divorce is on the horizon. Each option carries unique advantages and drawbacks depending on the couple’s debts, assets, income, and long-term goals.
Couples should consider questions such as:
- Do we want to eliminate unsecured debts quickly to simplify divorce negotiations?
- Do we need to protect a home or other valuable assets from creditors?
- Can we cooperate on a joint filing, or should one spouse file individually?
Because these decisions involve both federal bankruptcy law and California family law, the guidance of an experienced attorney is invaluable. Strategic planning can prevent costly mistakes, minimize delays, and position each spouse for a more secure financial future after divorce.
Contact Wadhwani & Shanfeld
If you are considering bankruptcy while facing divorce, the decision between Chapter 7 and Chapter 13 is one of the most important financial choices you will make. Our dedicated team at Wadhwani & Shanfeld has helped thousands of clients evaluate their options and choose the right path forward.
We understand the complex intersection of bankruptcy and family law in California and will work with you to protect your rights and your future. Contact us today for a confidential consultation.
Source:
uscourts.gov/services-forms/bankruptcy/bankruptcy-basics
cacb.uscourts.gov/faqs/before-filing
