Divorcing couples in Arizona often face financial challenges surrounding the division of liabilities as well as assets. Mortgage loans, for example, present difficulties when attempting to reach an equitable division of property. In many cases, Chapter 7 bankruptcy may provide relief from some of these struggles.

Certain steps may help minimize the effects of financial issues on credit scores during a divorce. It should first be confirmed that the spouse considering bankruptcy will be responsible for the mortgage by confirming whether a couple lives in an anti-deficiency state. Anti-deficiency laws prevent spouses from being held liable for any difference between the amount owed on the property and the amount the property sells for in the event of a foreclosure. Before filing for bankruptcy, it is important to have this information.

Once this has been confirmed, a bankruptcy proceeding can be initiated. Prior to filing, a person should know whether he or she is eligible to file under Chapter 7 of the bankruptcy code, which offers a fresh start by eliminating liability for certain secured and unsecured debts. This should be done before filing for divorce. The filing spouse should not then agree to responsibility for joint debts in the divorce agreement. This re-establishes liability for debts that were eliminated in the bankruptcy. If the divorce is filed first and a spouse agrees to be responsible for joint accounts, bankruptcy will not eliminate that debt. Once these things have been done, the marital home can be sold to minimize negative effects on both spouses’ credit, assuming both spouses agree to the sale.

When attempting to navigate complex divorce and bankruptcy laws, it may be advisable to seek counsel from an experienced bankruptcy law attorney. This can help to relieve some of the stresses inherent to divorce litigation.

Source: Fox Business, “Which Should I File First: Divorce or Bankruptcy?“, Justin Harelik, July 10, 2013