Practical Bankruptcy: Filing without Your Spouse if You Need Different Solutions
Although rare, sometimes it’s best for one of you to file a Chapter 7 case and the other a Chapter 13 one.
Usually married couples file bankruptcy together. Their debts and assets are intertwined enough that if they both need relief, they need the same kind of relief.
The last two blog posts were about situations in which spouses do not file bankruptcy together because one of them does not need its benefits.
But what if you both need help, but different kinds of help?
After all, two people can have different debts, different assets, and other financial differences, and so they may well each have a different way to solve their financial problems. Even if those two people are married.
When Two Simultaneous Bankruptcies Are Worthwhile
Most of the time, the detriments of filing two separate bankruptcies for two spouses at the same time are not worth the benefits of doing so. One detriment is cost—paying two sets of filing and attorney fees instead of one.
For the benefits of filing separate cases to be worth the extra cost, the two spouses must have quite different financial lives which need separate solutions. The following example illustrates how separate bankruptcies could be worthwhile.
Larry and Nanette, married for the last 10 years, have each been operating their own sole proprietor businesses for the last 5 years. Both businesses have shown some promise but are currently seriously struggling.
Each of them has received lots of good business advice about their businesses’ prospects. From this Larry has decided to close his business and return to the labor force as an employee, while Nanette has decided to redouble her efforts and keep operating her business.
Larry has incurred a large amount of general unsecured debts from the business, and he is anxious to discharge those debts in bankruptcy quickly in order to get a fresh start. He wants to file a Chapter 7 “straight bankruptcy” case.
Nanette is more concerned about preserving her business, and figuring out how to take care of her tax problems—she owes a lot of payroll withholding taxes for her one employee, plus a chunk of individual income taxes for each of the last 4 years. She and Larry have filed separate tax returns since starting their businesses so Larry is not liable for any of her tax debts. She needs a Chapter 13 “adjustment of debts” both to protect her business and to have time to pay her back taxes while being shielded from the tax authorities.
So after each receives independent legal advice about their respective options, Larry files a Chapter 7 case while Nanette a Chapter 13 one.
Within 4 months Larry receives a discharge of all his debts, and he can start rebuilding his credit.
Nanette retains the opportunity to keep operating her business and, since she does not have to deal with pressure from most of her creditors, the business improves over time. Through her Chapter 13 plan Nanette is given 5 years to pay those back taxes that can’t get discharged, and does so through monthly payments based on her ability to pay, while not having to pay any more accruing interest or penalties. At the end of the case, Nanette’s business is vibrant, she is current on her taxes, and is debt-free.
Both Larry’s and Nanette’s very different goals were accomplished, but only because different tools—different kinds of bankruptcies—were utilized to do so.