Legal separation refers to the process of formally resolving the controversies that arise out of a marital breakup. Couples planning to divorce must deal with issues of child custody and support (if they have children), spousal support and property and debt distribution. While many states allow you to get a divorce without a legal separation through no-fault divorce, you typically need only comply with your state's mandatory physical separation period before filing your petition. However, by seeking a legal separation, the court clearly defines your rights and responsibilities to one another upon separation.
Chapter 7 vs. Chapter 13
If you're considering bankruptcy, you can choose between Chapter 7 and Chapter 13. In Chapter 7, your non-exempt assets are sold and the proceeds applied against your outstanding debts, after which you receive a discharge of your eligible debts. In Chapter 13, you pay a percentage of your income to your creditors for a period of three to five years before your discharge becomes final. While you're allowed to file in either chapter during your separation case, the outcome of spousal support and property and debt division hearings can affect your bankruptcy. Your spouse being ordered to pay you alimony or assist in paying your debts could render you ineligible for Chapter 7 and leave Chapter 13 as your only viable bankruptcy option. In Chapter 13, receiving alimony could increase your disposable income and cause an increase in your plan payments.
Regardless of whether you file for Chapter 7 or Chapter 13, certain debts are nondischargeable, meaning they'll still be there when your case is over. Child and spousal support -- past, present and future -- will survive the bankruptcy and remain collectible afterwards. Student loans and certain tax debts are also nondischargeable. In Chapter 7, responsibility to the other spouse for marital debts is nondischargeable as well. This means that if the court assigns a joint debt to you in your separation case and the creditor comes after your spouse when you receive bankruptcy protection, your spouse can come after you -- even if the creditor cannot.
Just as your legal separation case can affect your bankruptcy, your bankruptcy can affect your legal separation. If you receive a discharge of your debts in federal court, your state family court could use your additional disposable income to reduce your alimony award if you're a receiving spouse, or increase your obligation if you're a paying spouse. If your spouse gets saddled with debts that otherwise would have been distributed to you, she may try to use this additional responsibility -- and your new-found financial freedom -- to obtain an upwards deviation of your state's child support guidelines.