What You Should Know about Filing Chapter 7 Bankruptcy and Divorce

If you’re interested in starting over both financially and personally, and you want to file for both a divorce and bankruptcy, you want to understand what you’re getting into before you begin either one of these proceedings. Yes, you can file for bankruptcy without your spouse. However, whether you want to do this before, during, or after your dissolution of marriage will depend on the details of your particular financial situation. 

In general, filing a New York Chapter 7 bankruptcy gives you the chance to discharge unsecured debts. But, in order for you to be eligible for filing a petition under Chapter 7, you have to meet the requirements, which is the “means test” where your income must fall below the designated income threshold. If you do indeed qualify, some of your assets (including your home) may be liquidated if you aren’t able to protect them using allowable state or federal exemptions.  

Identify your Property Interest in your Primary Residence

If you own your home with your soon-to-be ex, it’s important to distinguish the type of ownership interest. Is it as joint tenants with rights of survivorship? Or as tenants in common or as tenants by the entirety? The deed should indicate the interest based on the specific language. However, if it doesn’t, the general rule is that if the property was purchased during the marriage and a divorce hasn’t happened, New York law determines that the property interest is tenants by the entirety.   

Consequences of Chapter 7 Bankruptcy 

Be aware that as of the case commencement date, if you’re the solo filing spouse and you have an undivided interest in the property (tenancy by the entirety, joint tenancy, or tenancy in common), the bankruptcy trustee may sell both the estate’s interest and the non-debtor co-owner’s interest in the property.

Exemptions to Take

There are several exemptions under both federal law and New York State law. However, the specific ones to take depend on your individual situation. If you file alone, the allowable NY state exemption is $89,975 (it’s higher in some counties, including Nassau County and Suffolk County), but if you file as a married couple, the exemption is double, as long as you both own the property.   

Factors that Affect Whether the Trustee Sells the Home

There are many factors that help to determine whether or not the trustee will sell your home, including the following:

  • The value of the property (not the original purchase price of the home)
  • Mortgages and other liens encumbering the property
  • Homestead exemptions

Under Section 363 (h) of the Bankruptcy Code, a trustee may sell these interests only under the following circumstances:

  • The partition of the property is impracticable and
  • The sale of the bankruptcy estate’s undivided interest in the property would end up substantially less for the estate than the sale of the property free on the non-filing spouse/co-owner’s interest and
  • The benefit to the bankruptcy estate of a sale of the property free of the co-owner’s interest outweighs any damage to the co-owners. 

Get Legal Help with your Bankruptcy Issues

If you don’t meet the Chapter 7 income requirement, you may want to file a petition with your spouse that will let you benefit from homestead exemptions if you own your home together. Because bankruptcy is a complex and specialized area of law, you need to talk to an experienced legal professional who can provide detailed assistance specific to your case. Contact an experienced MOWK Law attorney for assistance right away.