Connecticut readers might be interested to know that timing is a big issue when deciding how to handle circumstances involving divorce and bankruptcy. It is important to understand that bankruptcy is a window of opportunity that divorce can have a profound impact on. Sources suggest that filing for bankruptcy is best done before filing for divorce, but other issues, such as a looming foreclosure, may complicate the timing.
To maximize the financial benefits of a bankruptcy, foreclosure should be avoided. A foreclosure will show up on the credit report of both ex-spouses regardless of whether a bankruptcy is successfully filed. If anti-deficiency laws are applicable and non-mortgage debt is negligible, bankruptcy itself may even be avoided. Assuming bankruptcy is inevitable, a short sale is a better option to foreclosure. A short sale involves selling the house for less than it is worth.
As difficult as it may be, the cooperation of both spouses will be needed for the short sale, and can be beneficial for the rest of the process. However, when determining the division of assets, neither party should agree to be responsible for any debt as a condition of the divorce. This can undo any clearing of liability that the bankruptcy provided.
The most important thing to remember is that all parties should protect themselves. While cooperation is ideal, it is not always possible. A divorce lawyer may aid in defending property rights and shielding credit reports when couples decide it is time to part ways. They may also provide a bridge for communication so that both spouses can work as a team to avoid foreclosure.
Source: Fox Business, "Which Should I File First: Divorce or Bankruptcy? ", Justin Harelik, July 10, 2013