Going through divorce in bankruptcy

Justin HarelikQuestionDear Bankruptcy Adviser,
My husband and I filed a Chapter 13 bankruptcy back in November. We are now separated and as soon as we can save enough money, we will file for divorce. What can we do about the Chapter 13 case? I cannot afford to pay for half of that with having to support myself in another home.
-- Cathy

AnswerDear Cathy,
I'm sorry to hear about your pending divorce. Financial distress alone causes many or most divorces. Balance that with the difficulties of a Chapter 13 reorganization bankruptcy, and it's surprising that more of my bankruptcy clients don't ask this very same question.

You have a couple of options to explore.

As you know, Chapter 13 is a repayment of none, some or all of your debt over a three- to five-year period. Most or all of your creditors are lumped together into one large pool. You then make payments each month to the person assigned to your case, called a trustee. The trustee distributes your payment to the creditors.

When you file bankruptcy, a "snapshot" is taken of your current financial picture. You and your husband filed Chapter 13 bankruptcy because you were trying to save an asset like a home or you made too much money to qualify for Chapter 7 bankruptcy.

A Chapter 13 bankruptcy case is rigid, but not inflexible. The trustee knows that life can change over the three to five years of the bankruptcy. People get divorced, become sick, retire, lose jobs or see income reduced. You cannot be expected to maintain a payment plan based on a snapshot when your financial picture has changed.

At this point, consider these two options:

1. You and your husband convert to a Chapter 7 bankruptcy.

You now live in separate households, which means your expenses are going to increase dramatically. You might have enough new expenses that would now qualify you for a Chapter 7 bankruptcy, allowing you to wipe out your debt.

One major issue will be the reason that you filed Chapter 13 bankruptcy. You might have filed because you were trying to save your home from foreclosure. That means that you are inside the plan in order to pay back the delinquent payments on your home. This could exclude you from converting to a Chapter 7 unless the mortgage company works with you and your husband for a loan modification. Otherwise, converting to Chapter 7 might mean you will lose the house.

2. If you can't convert to a Chapter 7 bankruptcy, ask for a lower payment.

You might be able to lower your repayment plan's monthly payment. With new and separate household expenses, you could request a modification of your plan payment. You would need to file a motion with the court and the trustee assigned to your case would review your new expenses against your current income.

Unfortunately, the type of plan under which you pay could make it impossible to lower the payment much, if at all. If you are in a "low-percentage plan," meaning you are paying back a very small portion of your bills, lowering the payment might not be possible.

Very few people file Chapter 13 bankruptcy without an attorney. A Chapter 13 bankruptcy is much more complicated than a Chapter 7, and very few people get this type of case completed without competent legal assistance. An attorney could assess your situation and determine whether either of these options is available to you.

Bankrate's content, including the guidance of its advice-and-expert columns and this Web site, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this Web site is governed by Bankrate's Terms of Use.

Read more Bankruptcy Adviser columns and more stories about debt management. To ask a question of the Bankruptcy Adviser go to the "Ask the Experts" page, and select "Bankruptcy" as the topic.

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