When deciding to file a Chapter 13 jointly with your spouse, realize that you can split that case later into two cases if you get divorced.
A Chapter 13 “adjustment of debts” case usually lasts three to five years, and a lot can happen in that time. It is not likely worth filing jointly with your spouse if you already believe your marriage won’t last that long. Chapter 13 provides much relief. It can even help your marriage because of the financial pressure it can relieve. But the two of you still very much need to be on the same page to make it work.
You can believe in the stability of your marriage but you’d still be wise to want to know what happens to your Chapter 13 case if things don’t work out between the two of you.
Dismissal and Converting to Chapter 7
In the last two blog posts we’ve covered voluntarily dismissing your case, and converting it into a Chapter 7 one. Those two ways to end a Chapter 13 case may be appropriate if your marriage is ending.
You can almost always dismiss a Chapter 13 case, including a jointly filed one.
Bankruptcy law recognizes that a Chapter 13 case is a big commitment. To encourage you to make this commitment, the law allows you to freely leave it if you want to later.
So if the two of you get to the brink of divorce, your bankruptcy lawyer can file a simple motion for the dismissal of the case. It will almost certainly be granted quickly.
Once your joint Chapter 13 case is dismissed each person can decide what is best for him or her. Each can separately decide whether to file a new individual Chapter 13 case, a Chapter 7 “straight bankruptcy” case, or neither.
Or instead your joint Chapter 13 case can usually be converted into a joint Chapter 7 case. With a separation or divorce on the horizon the reasons that Chapter 13 made sense earlier may no longer. For example, saving the family home from foreclosure may be both less important and less financially feasible. Converting the case into a Chapter 7 one can get it completed within another three or four months. That timing may work better with your changed circumstances. And Chapter 7 results in a discharge (legal write-off) of all or most of your debts. That would not happen with a dismissal of the Chapter 13 case.
Severing a Chapter 13 Case into Two Separate Cases
Your joint Chapter 13 case can also be “severed” into two separate Chapter 13 cases. This is routinely allowed by the bankruptcy court, especially if you and your spouse are separating or divorcing.
Once the case is severed into a separate case for each person, then each can independently do whatever is in his or her best interest.
One or both of you may have a good reason to continue under Chapter 13. One of you may have a vehicle being paid through favorable cramdown terms. Or there may be personal income taxes that one or both of you are paying through the plan without additional interest, penalties, or threat of collections by the IRS or the state. So either person could file a new amended Chapter 13 plan in his or her own case incorporating the changed personal and financial circumstances.
One or both of you may instead convert your half of the case into a Chapter 7 one. You’d do this if there’s no more reason for being in Chapter 13.
Or, after the case is severed into two, either person can dismiss his or her case. That might make sense if that person no longer needs bankruptcy protection.