Non-Filing Spouses and Bankruptcy

Married couples are not required to file a joint bankruptcy when one spouse needs to file. Having one spouse file, and one spouse NOT file is completely permissible. However, the non-filing spouse will usually need to provide some information for the petition, even if they are not included. This is because the bankruptcy court considers household income when married spouses, living together, file a bankruptcy. The are also a few other things to consider when filing a bankruptcy for married couples, as well.

When a bankruptcy is filed, a means test must normally be completed to show household income for the six months previous to filing bankruptcy. This includes the income of non-filing spouses. Some of my clients will ask, "but, my husband/wife is not filing, why does their income need to be considered?" It does because, basically... bankruptcy law says it must be included. Congress determined in drafting the bankruptcy code that the ability of one spouse to repay the other's debt should be considered, so that is the law we need to work with, for better or worse. For that reason, I will need to 6 months of pay stubs for BOTH spouses. I will also normally need two years of tax returns for spouses, as well.

Once again, you need to be married for this to be the case. The income of fiancees or boyfriends/girlfriends does not need to be considered. Also, you must be living in the same household as your married spouse. If you are separated and keeping separate households, only the income of the filing spouse must be considered.

Non-filing spouses may also be important in determining the status of your property at the time of filing, and whether it can be protected from your creditors in bankruptcy. The bankruptcy exemptions normally allow filers to protect all of their property, but sometimes these exemptions can be exhausted. For instance, you are normally allowed to protect about $26,000 in equity in your home. This can be a problem in filing Chapter 7 bankruptcy if your equity exceeds $26,000. However, if you are married, and your non-filing spouse has a 1/2 interest in your home, your equity is essentially cut in half, because 1/2 of it belongs to the non-filing spouse. This makes it sometimes important to verify if both spouses are on a deed, and can sometimes be important with other exemptions. Therefore, sometimes we need to consider the property of the non-filing spouse.

Joint debts are also important to consider when one spouse does not want to file bankruptcy. Joint credit card debt, and car payments, are both considered "joint and several liability". This means a creditor can go after one spouse, both spouses, or neither spouse, when collecting a debt. And they can go after just one spouse for all of the money owed on a debt. This becomes important if there are numerous joint debts and only one spouse files a bankruptcy. While the filing spouse will have his or her debts discharged through the bankruptcy, the non-filing spouse will become entirely liable under joint and several liability. So, it is very important to determine who is on each debt, and for how much, because in some cases it will only make sense for both spouses to file jointly.

Contact us if you are trying to decide if filing bankruptcy jointly makes more sense, or if you are able to have only one spouse file. I'll happy to sit down and discuss your situation and see what makes more sense for your household.

Credit Card Debt and Married Couples

Marital credit card debt is a frequent cause of strife in marriages and a major cause of bankruptcy filings. Marital credit card debt may include debts solely incurred during the time of the marriage. It may also include some debts from before the marriage. Either way, it can burden married couples to the point of destroying the relationship.

Fortunately, most marital credit card debts can be discharged in bankruptcy, including  both joint and individual credit cards. Therefore, a joint card opened before (or after) the marriage is dischargeable in bankruptcy. At the same time, an individual card opened by one of the spouses, opened years before the marriage, is also dischargeable in bankruptcy. Any and all such combinations will be dischargeable, IF the couple files jointly.

This raises a scenario that sometimes occurs... what if one spouse does not want to file bankruptcy? What will happen to the marital credit card debts? In these cases, it will be important to know who is legally obligated on the debt. If only one spouse files, debts solely in his or her name will be discharged in the bankruptcy. Simple enough. This is often sufficient in cases where one spouse entered the marriage with significant credit card debt of their own. But, what about the joint debts?

Joint debtors are "joint and severally" liable. This means their creditors can go after one or both debtors for part (or all) of the debt. This may seem unfair in situations where one joint debtor has numerous attachable assets, while the other has nothing. In any case, this is the law. The creditor can go after whoever it wants, which will almost always be the person with something to take.

So, if one spouse files a bankruptcy on a joint credit card, his or her liability on the debt is wiped out. However, due to joint and several liability, the creditor can go after the non-filing spouse for the full amount. Due to this reality, it is almost always advisable for married couples with significant joint debt to file jointly. It reduces cost (the filing fee is the same for joint bankruptcy filers) and saves time. Not filing a joint bankruptcy will do no good for the household if the creditor can still collect on and possibly sue the non-filing spouse.

In many situations, the debt is in various forms, both joint and individual between the spouses. Contact us for a free bankruptcy consultation to determine if filing bankruptcy jointly, or individually, is the best option for your family. There may be situations where the individual debt of one spouse greatly exceeds any joint debts. I will be happy to walk you through the situation and give you the best options available. 

Eliminating Joint Debt in Bankruptcy, Part 2

In my previous post, I discussed how joint debts can make two individuals liable, even when only one enjoyed the benefits of the loan. In this post, I will discuss when joint debts can (and cannot) be eliminated through Chapter 7 bankruptcy and Chapter 13 bankruptcy.

The easiest way to dispose of joint debts in a bankruptcy is to file a joint bankruptcy. Joint bankruptcies allow two debtors to file at the same time with one petition, adding convenience and reducing costs. Joint bankruptcy is only allowed, however, with legally married couples. Boyfriend-girlfriend, bother-sister, parent-child, BFF-BFF... none of these can file a joint bankruptcy. Only a legally married couple can file (NOTE: recent case law and practice allows this to include same-sex couples). Engaged doesn't count, you need to be married at the time of filing.

So, if you are a married couple, with joint marital debts, you can file a bankruptcy to discharge these joint debts in one filing. If this is an option, the process will be pretty simple and it is a great, efficient way to deal with your financial problems.

Where things get murky is when only one co-debtor wants to file bankruptcy, or only one co-debtor is able to file. If you have a co-signed loan on which you are liable, and you file an individual bankruptcy, your personal obligation on that debt will be discharged and eliminated. However, your co-signer will become completely liable on the loan. The debt is only wiped out as it relates to you, it is not completely eliminated. The creditor can still pursue your co-debtor.

This will sometimes lead to a situation where a non-filing parent or spouse is left on the hook with the debt. If they are unable or unwilling to file their own individual bankruptcy, this debt will lead to collections and lawsuits. In these cases, after your discharge you can voluntarily help pay back your joint debtor, though you are under no legal obligation to do so. It is up to you.

There is one scenario where a joint debt may NOT be dischargeable in bankruptcy when you file on your own. If you have agreed to assume a joint marital debt (or any marital debt) as part of a formal property settlement agreement in a divorce, you cannot eliminate this debt in a Chapter 7 bankruptcy. This marital debt can only be eliminated in a Chapter 13 bankruptcy (which may require you to repay some money to your creditors). This policy of bankruptcy law protects divorced spouses who have negotiated in a divorce from being made liable on joint debts they rightfully negotiated away as part of the settlement.

This one example aside, if you file bankruptcy on a joint debt, your obligation will be cleared away. You can also be on the other side of this scenario... if someone you share a joint debt with files without you, YOU will become wholly liable. This is important to understand, us you may in turn need to file a bankruptcy.

If you are dealing with joint debts, contact us to set up a free consultation to see if bankruptcy is an option for eliminating the debt.