By Jeena Cho, San Francisco Bankruptcy Attorney

Recently, I was talking to a family law attorney who commented that most of her clients were fighting over allocation of debt instead of division of assets. One specific example she gave was a couple who had about $80,000 in credit card debt. Husband earned $120,000 per year and wife earned $50,000. They were considering selling their home so that each spouse can assume their share of the credit card debt and not have to worry about servicing the mortgage.

I asked her, “have they considered bankruptcy?” She looked at me and said, “no, because they make too much money.”

This is a common misconception among many professionals about bankruptcy - if a person earns above the “median income” or “too much income” he or she does not qualify for bankruptcy. In my example above, if the couple chose to file for bankruptcy before the divorce, they would most likely qualify for Chapter 7 bankruptcy because they can use the mortgage payments to offset their income.

If they chose to file, either jointly or separately before the divorce, they can discharge all of the credit card debt. This would obviously give them more options in terms of keeping or selling the home. It also eliminates disputes concerning how the debt will be divided.

Another example is when the couple is considering selling their home with equity to repay unsecured debt. Again, bankruptcy may make sense in this situation as well. A family unit can protect up to $100,000 in equity ($175,000 in some circumstances) through Chapter 7 bankruptcy in California. So, using my example above, if there is less than $100,000 of equity, the couple can file for Chapter 7, protect all of the equity and discharge their debt.

In the event that the couple can’t qualify for Chapter 7 bankruptcy due to too much income or too much equity, Chapter 13 may be a viable option. Chapter 13 is a partial repayment plan, which is determined by their “disposable monthly income” or “liquidation analysis.”

Chapter 13 can also be useful in dealing with missed mortgage or car payments and taxes by offering up to 5 years to “catch-up” on the payments.

Bankruptcy can be a strategy to deal with overwhelming debt, either before or after the divorce.