Practical Bankruptcy: Filing without Your Spouse if Most of Debt Is in Your Name
Be very cautious about filing without your spouse if the main reason for doing so is that you believe only you are liable on the debts.
The last blog post listed some situations when you should consider filing a bankruptcy without your spouse. Today’s covers one of those situations.
The Benefits of Filing Alone
Any decision, including whether to file a bankruptcy case with or without your spouse, involves weighing costs and benefits.
The potential benefits of filing alone include:
1) not harming a spouse’s credit record for his or her individual benefit if he or she genuinely does not need bankruptcy protection;
2) improving the prospects of making future joint credit purchases by preserving a spouse’s good credit record;
3) respecting the decision of a spouse who chooses not to be involved in a bankruptcy case; and
4) helping to preserve a marriage by accepting responsibility for individually acquired debts without forcing your spouse to take the fall with you.
The Potential Costs of Filing Alone
The biggest risk of filing without your spouse comes from the fact that the discharge (legal write-off) of debts does not apply to the non-filing spouse. So if he or she owes any debts—either jointly with you or independently—he or she would continue owing them after your bankruptcy case.
Other than in very new marriages—addressed in the last blog post—it is rare for one spouse to be solely liable on all of the debts.
This is especially true in community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin, or Alaska if you’ve opted in to community property arrangements). In these states, in general you and your spouse are jointly responsible for debts either or both of you incurred during your marriage, even if one of you was not a party to the debt contract.
But even outside community property states, both spouses could be liable on debts you had assumed that only one was. The laws in this arena vary greatly state by state, so it’s critical to have an experienced and thorough attorney review your debts to find out who is liable on each. What you learn about this will greatly impact whether you decide to file jointly or on your own.
Jake and June have been married for 10 years, and live in a non-community property state. Four years ago June started a small retail business, with only the grudging support of Jake. They both had excellent credit, and he was particularly anxious about protecting his. She signed a 5-year lease for a small shop, got a business line of credit with the local community bank, and over time established credit arrangements with providers of inventory, professional services, and other suppliers. As they had agreed in advance, Jake did not sign any of these leases or credit agreements, nor did June offer these business creditors collateral in the form of any assets in which Jake was a part owner.
After 3 years of struggle, June’s business failed. She owes nearly $100,000 in business debts. She met with an established bankruptcy attorney, telling him that she wanted to do everything possible to prevent Jake from needing to file bankruptcy with her. The attorney reviewed each one of her business debts, verifying that Jake was not liable on any of them, either by contract, by law, or on any other basis. Jake and June do have a jointly owed mortgage, as well as two auto loans that they both signed on, but have managed to stay current on these and want to continue doing so. Jake has no other debts.
On her attorney’s advice, June decides to file a Chapter 7 bankruptcy case by herself to discharge all of her business debts. Since only she is liable on these, there is no need for Jake to join her in the filing. She also feels an obligation to Jake and to their marriage to put this business venture and its debts into the past as quickly and thoroughly as legally possible. She also decides to reaffirm her debts on the mortgage and two vehicle loans, thereby getting a leg up on quickly rebuilding her credit, both for her own benefit and for any future joint credit purchases with Jake.
Because of Jake’s lack of liability on any of the debts June needs to discharge, and his lack of other debts that need to be discharged, June is able to file bankruptcy without Jake. Jake’s credit record is not directly harmed, and June acts to improve her credit record right after her bankruptcy is completed, to minimize the harm to their joint credit record. June’s (and Jake’s) goals are accomplished.