A bankruptcy filing is a provision under federal law that provides debt relief to those who need it the most. Your spouse's involvement in the bankruptcy may increase the difficulty of the case.
Prior to embarking on the long treacherous process, married couples should have a basic understanding of possible outcomes. You should consider taking a Chapter 7 Means Test Calculator or estimate your Chapter 13 Repayment Plan to help understand differences between options such as the total costs or the pros and cons.
These calculators will help you determine whether you qualify along with comparing debt relief options. There are many debt relief options. It's important to weigh all your options and know the pros and cons of each option. You may find that you do not even have to file a bankruptcy. I have included a link to the calculator below.
Under federal laws, you may be able to file individually while married. In this case, the court will try to ascertain whether there are joint properties or shared debts. Please note that the American Bankruptcy Institute stated in (In re Matson, 509 B.R. 860, 864 (Bankr. E.D. Wis. 2014).) that the court held that same-sex couples who filed as joint debtors were "spouses" for the purpose of bankruptcy code even though the petition was filed in a state that didn't recognize same-sex marriage.
In the case of joint debts, a bankruptcy filing by one partner is likely to affect the other partner’s credit report. Creditors are notified once the process starts. Therefore, they can still come after a spouse to collect any debts even with a bankruptcy filing.
The likelihood of a bankruptcy filing affecting a spouse also depends on property laws depending on the state. Depending on whether one partner files for Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, a spouse may have to contend with some consequences.
In the case of properties, Bankruptcy will not in any way affect any separate property owned by a spouse. However, it is important to note whether the jointly owned property is protected under community property state law or common law as this will determine the impact of bankruptcy.
Property owned by a spouse is usually not at risk, in cases of a bankruptcy filing by one partner, under Common Law. However, under Community Law provision, property acquired during the marriage can be used to satisfy debts in the case of a bankruptcy filing by one spouse.
That said, you should also consider reading the IRS' publication that outlines Election by debtor's spouse and later bankruptcy of spouse. You should also consider that bankruptcy law does protect more than just a spouse's refund.
There are many reasons to want to not have your spouse involved in bankruptcy. If it's at all related to divorce, you may want to check these two articles, "Bankruptcy and Divorce" and "Bankruptcy After Divorce".
As discussed above, you may be able to file bankruptcy individually while married. It is also possible to file for bankruptcy as a couple. Filing as a couple may be an ideal option in the case of joint properties and debts. Single persons can also file for bankruptcy.
The mode of filing depends on where a married person lives and what property they own. You should determine whether you own the property jointly or individually with your spouse. It is advisable to file for bankruptcy individually as a way of protecting the other spouse’s credit.
An individual filing is also ideal in cases where each partner in the marriage owns separate properties or assets.
While filing for individual bankruptcy, it is important to note that spousal income counts even if he or she is not part of the petition. Income generated by a spouse dictates the type of bankruptcy one gets to file.
One can only qualify for an individual bankruptcy filing if their spousal income is below a certain amount under Chapter 7. For Chapter 13 filing, a spouse's income must be above a certain income level. It is common for a bankruptcy attorney to ask for income generated by each spouse. You will find that both incomes are used to evaluate eligibility as it pertains to the individual filing.
In the case of joint debts, an individual bankruptcy filing does not protect the other partner. Individual bankruptcy filing only affects personal liability. In this case, creditors would still be able to pursue the other spouse to recoup any money owed.
However, creditors cannot pursue collections on debts from a spouse when the debt is in the name of the person filing for bankruptcy.
If you live in a community property state such as Arizona or Texas, creditors can still go after your spouse's separate property to settle part of the debts after bankruptcy. The law, in this case, assumes that all property acquired during marriage is community property.
Filing for bankruptcy as a couple is very much possible. In this case, both spouses file a joint petition. The bankruptcy file lists both party's names. Married couples can file a joint petition as a way of keeping costs down. Bankruptcy attorney fees will be much lower for a joint filing as opposed to each partner filing separately.
You will find that a joint filing can be more efficient. It allows the couple to file just one petition. Both spouses also get to attend hearings together and get the opportunity to discharge all their debts on a single filing.
One of the major drawbacks of joint filings has to do with the fact that some state laws limit the amount of property that couples get to protect. Joint filings are also not ideal in instances where one spouse owns a lot of non-exempt property.
Filing for bankruptcy as married couples will always come down to the amount of property jointly owned. It also depends on the exemptions that the couples stand to enjoy.
Finally, you should also consider how filing with a spouse may impact tax liability.
Yes, you can file a Chapter 13 bankruptcy case without your spouse, but your spouse’s income is included in your Chapter 13 case. Your spouse is not required to help you pay your Chapter 13 plan payment, but his or her income could increase the plan payment in some cases. Again, household income and household expenses are included in a bankruptcy case even though only one spouse files for bankruptcy relief.
However, you can use the marital adjustment to reduce the impact your spouse’s income has on your Chapter 13 plan payment. The marital adjustment allows you to deduct your non-filing spouse’s separate and personal expenses from his or her income.
You will find that the jurisdiction will view the martial deduction differently. Some examples of marital deduction:
The marital adjustment can be challenging to use. Spouses must be careful not to misreport income and expenses because that could result in a denial of the spouse’s bankruptcy discharge.
For a Chapter 13 bankruptcy, you may want to take a Chapter 13 calculator to estimate what your payment plan would be. You can then compare that to your monthly obligations. In this calculator, you can also compare Chapter 13 bankruptcy to other options such as debt management and debt settlement.
When you file a bankruptcy case without your spouse, the main concern for your spouse is protecting his or her interest in assets.
Regarding assets owned solely by your spouse, your bankruptcy filing does not jeopardize separate property owned by your spouse. However, as we discussed above, if you live in a community property state, all property acquired during the marriage is considered marital property, with very few exceptions. In a community property state, marital property can be used to pay debts in either spouse’s name if the debt was incurred during the marriage.
If you do not live in a community property state, your spouse’s interest in the marital property cannot be used to pay debts that are solely in your name. For example, if the Chapter 7 trustee liquidates an asset to pay your creditors, the Chapter 7 trustee must pay your spouse his or her one-half interest in the property from the proceeds of the sale.
Most spouses file joint income tax returns. Therefore, you may also want to read the IRS publication that outlines election by debtor’s spouse and later bankruptcy of a spouse. You should also consider that bankruptcy law does protect more than just a spouse’s refund.
In the case of joint debts, an individual bankruptcy filing does not protect your spouse from debt collections for joint debts. An individual bankruptcy filing only impacts your personal liability for the debt. Creditors cannot attempt to collect discharged debts from the debtor.
However, if your non-filing spouse is a co-debtor, the creditor can take all legal actions to collect the unpaid debt from your non-filing spouse. Actions include, but are not limited to, debt collection lawsuits, wage garnishments, repossessions, foreclosures, levies, and seizures. The creditor may need to wait until your bankruptcy case is closed, or it can petition the court to proceed with collections against your spouse for the joint debt.
It is important to read the credit agreement for each debt before filing bankruptcy. In some cases, your spouse could be responsible for a supplementary cardholder account. A supplementary cardholder has a credit card in his or her name with the same account number assigned to you as the primary account holder. This situation usually happens when a spouse applies for credit and answers “yes” when the company asks if the person wants a card for his or her spouse.
A supplementary cardholder’s liability for the account is defined under the terms of the credit agreement. In some cases, the primary account holder is solely liable for all charges on the account. However, in some agreements, the supplementary cardholder is jointly liable or liable for charges made with the supplementary card.
There is a difference between a joint account holder, a supplementary account holder, and an authorized user on an accident. The terms of the credit agreement define the roles and liability for each person.
A joint account holder promises to pay the debt if the other account holder does not pay the debt. The joint account holder is equally liable because the account is in the names of both parties. As explained above, a supplementary account holder may or may not be liable for the debt. This depends on the terms of the agreement.
However, an authorized user is a person that an account holder grants the authority to use the account. The authorized user cannot change the account in any way and is not responsible for payments on the account. Therefore, if the account holder files for bankruptcy relief, the creditor cannot collect the debt from the authorized user. Also, the bankruptcy filing should not impact an authorized user’s credit score.
Even so, it may be a good idea to remove authorized users from credit accounts before filing the bankruptcy case. Removing the authorized user can avoid any errors on his or her credit report that would need to be corrected. Often, creditors incorrectly report the status of a credit account on an authorized user’s credit report. This can be frustrating and time-consuming to correct.
As explained above, if the debt is in your name only, filing an individual bankruptcy case should not impact your spouse’s credit in any way. The debt should not appear on your spouse’s credit report.
It is a good idea for your spouse to pull a free copy of his or her credit report after your bankruptcy case is complete to verify that creditors did not incorrectly report information from your bankruptcy case on your spouse’s credit report.
However, if your spouse is a supplementary or secondary cardholder, you need to check your credit agreement. If your spouse is responsible for the debt, filing an individual bankruptcy case will impact your spouse’s credit rating in the same was a joint debt.
If your spouse does not pay the joint debt, the creditor reports the delinquency on your spouse’s credit report. The late payments and collection efforts hurt your spouse’s credit score. If your spouse does not pay the debt, the creditor can pursue legal actions. You can resume payments to the creditor after your bankruptcy case is closed to prevent adverse consequences for your spouse.
Ascend wants to help you get out of debt. We have a variety of services available for individuals and spouses who want to take control of their finances. If you have any questions, please contact Ascend. Call or text us at 833-272-3631 if you have questions or help.