Married Couples in Chapter 7 and Chapter 13

Bankruptcy law allows married couples to file bankruptcy separately or together. That option comes with consequences, which can also affect whether you file under Chapter 7 or 13.

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If you’re considering filing bankruptcy with or without your spouse, consider the following:  

• Each spouse has the legal right to join the other spouse’s bankruptcy or not.
• There are consequences to filing separately or together. Consequences affecting:
  • the preservation of your assets;
  • protection from creditors’ collection activity;
  • the discharge of your debts; and
  • dealing with the IRS and any other income tax authorities.

Today’s blog covers the first couple of these points, and the next ones cover the rest.

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1.  Each spouse has the legal right to join the other spouse’s bankruptcy or not.

Married spouses often ask if they CAN file together, or if they MUST file together. By law, each person can file his or her own case alone, can file jointly with his or her spouse,  or can decide not to file at all. But the fact that all the options are on the table doesn’t necessarily make the choice easier. In many situations it is in both spouses’ best interest to file either a Chapter 7 or 13 case together, but sometimes there are good reasons for one of them not to be part of that filing.

It can be a delicate choice, legally and personally. One spouse may owe most of the debt, because of a failed business or a prior divorce. One spouse may have run up some debt irresponsibly, perhaps without telling the other. The marriage itself may well be at risk because of financial stress. We’ve all heard that financial problems are one of the top reasons for divorce. The survival of the marriage may hinge on making wise choices about whether to file bankruptcy, who should file, and what kind of case to file.

Another delicate question is whether your marriage will outlast a 3-to-5-year Chapter 13 case. The realities are that:

1) many Chapter 13s do not get finished successfully;

2) when one isn’t finished, dealing with the fallout can be awkward;

3) as much as a Chapter 13 can help your finances, it is a long process requiring some stability and consistency;

4) Chapter 13s can handle changes in circumstances, sometimes even a divorce, but it’s generally not wise to file one if the odds are that the marriage isn’t going to outlast it.  

So, if realistically the marriage is not stable enough to survive beyond the completion of a Chapter 13 case, then think about the Chapter 7 option instead.

2.  There are consequences to filing separately or together. Consequences affecting—

a. the preservation of your assets:

One spouse filing alone versus both filing jointly can have an effect on how well your possessions are protected by your applicable property exemption scheme.

In some states you must use that state’s property exemptions, in others you have a choice of that state’s and a federal set of exemptions. Under the federal exemptions, filing together simply doubles the value of the permitted exemptions, but many state exemptions either don’t increase the amount exempt in a joint filing for some asset categories, or increase it by less than double. So sometimes filing separately increases the amount of property held jointly that can be protected.

To explain this with a hypothetical example, let’s say you had $50,000 of equity in your jointly owned home, and the state’s law gave each individual a homestead exemption of $30,000 while giving each married couple an exemption of $40,000. If a husband and wife would file bankruptcy together, their $50,000 of equity would not be fully protected by their $40,000 joint exemption. But if only one would file, his or her single exemption of $30,000 would fully protect his or her half of the $50,000 equity—$25,000.

Because Chapter 13 is often a good way to protect assets that would otherwise not be exempt, it may be an acceptable alternative to the above type of maneuvering if the couple needs to file jointly for some other reason–such as if they both have substantial debt.

Beyond this, sometimes one spouse—one who has much less debt, for example—owns an asset that the spouse who owes most of the debt has no legal right to. For example, consider a relatively new marriage in which the spouse without much debt inherited some property before the marriage. That spouse may understandably not want to risk having that inherited property go to a bankruptcy trustee to pay the other spouse’s debts. So that spouse would understandably not want to file bankruptcy with her spouse.

This kind of situation has to be analyzed very carefully. Both spouses need to understand how well the separate property of the non-filing spouse can be insulated from the other spouse’s bankruptcy case. In Chapter 13 it is harder to avoid having the non-filing spouse’s income and assets affect the other spouse’s case. The two spouses need to be very clear about all the consequences of only one person filing either a Chapter 7 or Chapter 13 case. 

 

Please visit us for our next blog for part 2 of this topic.