Bankruptcy
Unfortunately, it is very common for a person to feel the need to file bankruptcy after a divorce. However, you cannot discharge certain debts, and you should know the rules and laws regarding debt you took on in your Marital Settlement Agreement or via a Court Judgment after a trial before you file bankruptcy or have that as part of your “back up plan” before you know the rules and laws.
If you want to file a Chapter 7 (where you discharge all of your qualified debt), there is a bar against discharging attorney fees and/or other debts you are required to pay pursuant to your dissolution action. However, under code 523(a)(15) claims and the related attorney’s fees are dischargeable in a Chapter 13 case as long as the debtor makes all plan payments and receives a discharge. The debtor will still owe the money if the debtor does not make the payments and get the discharge. Depending on the amount of debt involved, even if the debtor qualifies for Chapter 7, Chapter 13 may be a better option to eliminate that extra debt.
The Immediate Impact on Your Credit Score
Bankruptcy isn’t a lifelong sentence to bad credit; however, it does require effort and time to restore your financial standing, it’s a tradeoff. Bankruptcy eliminates or reduces debt that’s impossible to manage. However, it also labels you as a credit risk, leading to a significant drop in your credit score and an increase in your interest rates.
Under the FICO scoring model, a credit score of 700 or above could plummet by at least 200 points due to bankruptcy. If your score was around 680, you might lose between 130 and 150 points. However, if your credit score is already very low, bankruptcy may have no impact at all.
This drop can make borrowing and spending difficult, with challenges in obtaining credit cards, loans, or mortgages. The shadow of bankruptcy may linger on your credit report for 7 to 10 years, impacting your financial choices.
Those who already have lower credit scores might experience a different outcome. In some cases, bankruptcy improves credit scores, as it can clear negative items from credit reports, leaving only the bankruptcy itself as a negative remark.
The Different Paths: Chapter 7 vs. Chapter 13
Understanding the different bankruptcy chapters and their consequences is crucial for those considering this path.
Bankruptcy isn’t a one-size-fits-all solution. Its impact on your credit score depends on the type of bankruptcy you file. Consumers and small business owners typically choose between Chapter 7 and Chapter 13 bankruptcies, each with distinct effects on credit reporting. Some businesses even file a Chapter 11 (there will be no information here on a Chapter 11).
- Chapter 7: Often referred to as liquidation bankruptcy, Chapter 7 involves selling non-exempt assets (if you are over the allowable exceptions) to discharge unaffordable debt. This type has a more negative impact on your credit score, as it doesn’t involve repayment. Chapter 7 remains on your credit report for up to 10 years.
- Chapter 13: This type entails creating a repayment plan for some debts while discharging others. The credit bureaus report Chapter 13 bankruptcy for up to 7 years after receiving a discharge or dismissal. Chapter 13 is perceived more favorably due to the repayment aspect, potentially offering a slightly faster credit recovery.
Chapter 7 typically carries a more negative impact, given that you’re not making any repayments. In contrast, Chapter 13, where some debts are repaid, can be perceived more favorably by future lenders due to your payment history.
Bankruptcy's Impact on Debt Discharges
The way bankruptcy influences your credit score isn’t solely determined by the fact that you’ve filed for it. The extent of your debt discharge and the number of debts eliminated play a significant role in shaping the impact on your credit score.
One factor that influences how bankruptcy affects your credit score is the scale of the debt discharge.
Essentially, a debt discharge is the process by which your debts are forgiven or eliminated through bankruptcy. If you find yourself defaulting on multiple accounts with substantial balances, the repercussions can be more severe than if you were to eliminate lower debt amounts. In the eyes of most creditors and lenders, this default signifies a higher level of credit risk.
3 Common Questions About Taxes
For most people, filing taxes is complicated. However, it may be even more difficult for those recently divorced or recently separated than in prior years. With the tax deadline just passing on April 18, we will address the three most commonly asked questions.
What is your filing status?
Your filing status is based on whether you were married or single on the last day of the tax year. You are still legally married if you filed for divorce in 2025 but did not receive a decree, order, or judgment of legal separation before December 31, 2025.
Yes, even if you received your Final Judgment of Dissolution of Marriage on January 1, 2026, you are still considered married for the 2025 tax year. However, this does not mean you are required to file a tax return with your spouse. Instead, you could file “married filing separately”, or in some situations, as the “head of household.” If your divorce was final, you may file as “single” or “head of household” depending on your situation.
Tensions may be high during the pendency of the Dissolution of Marriage case. Therefore, it may be better if you both agree to request an extension from the IRS and address how you file taxes when you finalize your Marital Settlement Agreement.
Do you have to split tax refunds or tax liability?
It depends. The tax refund and the liability is most likely a marital asset or liability, but the date of separation and other factors may come into play. It is best to resolve these issues in a Martial Settlement Agreement or mediation before one or both of your file taxes while you are in the middle of a dissolution action.
It is important to note that the court views tax debt incurred while married as a marital debt. Even if you did not work while you were married, you are still jointly responsible for that tax debt. Given this, you must make your attorney aware of any unpaid tax debt.
Who claims the minor children?
Regarding the IRS, only one parent can claim a minor child on their tax return in any given year. Suppose you chose to file separately during the pendency of your divorce. In that case, you need to discuss who is claiming your children for tax purposes before filing.
If you have two children, then it is easy because each of you could claim one child. However, if you only have one child or an odd number of children, it may be difficult for you to reach an agreement. Regardless, you cannot both claim the same child(ren). This means you must reach some agreement or request an extension from the IRS. Once your divorce is finalized, your Marital Settlement Agreement or Final Judgment (if you have to go to trial) should address who claims each minor child for tax purposes.
There are many tax issues and financial considerations to be aware of during a divorce. We often recommend clients speak with a tax expert and work with one of our attorneys. This will create a Marital Settlement Agreement that addresses your tax concerns to avoid any future issues with the IRS.
Marital Assets
During a divorce in Florida, the division of marital assets is a significant aspect that requires careful consideration. Florida follows the principle of equitable distribution, which means that marital assets are divided fairly, though not necessarily equally, between spouses.
Marital assets include any property, assets, and real estate acquired by either spouse during the marriage, with some exceptions for assets acquired through inheritance or gifts that were kept separate. The court considers various factors, such as the duration of the marriage, each party’s financial circumstances, and contributions to the marriage, when determining how to divide marital assets.
Marital Business
If you start a business during your marriage, even if only one spouse is listed as the owner, it is marital property. Even more frustrating for some people to accept is that a business started before your marriage can be marital property. Of course, this depends on the specifics of a case and the potential of commingling.
Once the Court determines the business is marital property, the Court must determine the value of the said business. Each party may have a valuation done, or the parties could mutually agree to hire one person to evaluate the business. The next step is for the Court to distribute the business equitably between the parties. Generally speaking, the Court divides marital assets and liabilities equally. This happens unless there is a legally sufficient justification for an unequal distribution based on the relevant statutory factors.
When filing the petition, it is important to list the business as a party to the case. You want to be sure that the court has jurisdiction to split or sell the business or its assets and to be able to obtain business-related documents (specifically if it is a corporation).
Can you sell marital assets during a divorce?
Be careful, as there is a difference between purposefully wasting or dissipating a marital asset and using assets to pay for reasonable living expenses and attorney fees for your dissolution of marriage action.
Suppose you are in a situation where your spouse is not paying household expenses, and you need funds for attorney fees. In that case, it is permissible to use/sell marital assets to cover these costs. You should, however, keep proof of all of your expenses to prove the necessity and avoid the appearance that you are wasting, dissipating, or even hiding assets.
If you have an attorney and find yourself in a situation where you need to sell assets, be sure it is a permissible use of the funds. An attorney can file Motions to obtain attorney fees and/or support if you otherwise qualify.
On the other hand, if you are concerned that your spouse may be wasting or dissipating assets intentionally without the need, you will also want to bring this to your attorney’s attention in order to preserve assets that cannot be returned (sale of assets, cashing in a retirement account, etc.). A judge has the jurisdiction to freeze accounts to avoid waste or dissipation.
The Light at the End of the Tunnel
When it comes to managing overwhelming debt, it’s important to carefully consider all available options before committing to bankruptcy. Each individual’s financial situation is unique, and what works for one person may not be the best solution for another.
For more information regarding your particular case facts, you should consult the attorneys here at Schwam-Wilcox & Associates. We will do everything in our power to ensure you can engage in an affordable and satisfactory separation, despite the economy’s standing and your personal economic status. Our office is located near Altamonte Springs outside of Orlando, Florida, with satellite offices in The Villages.
