A married person can file bankruptcy alone or jointly with his or her spouse. The better option depends on circumstances such as:
- The type and extent of joint debts the couple has
- The property the couple owns jointly
- The income of each party
- Any separate assets each party has
- Any separate debts of the parties
If both parties have substantial debt and will need to file at some point, it may be beneficial to file jointly. Separate cases will cost double the amount of fees and expenses. It is also important to note that while a separate bankruptcy makes sense in many cases, the non-filing spouse is not entirely ignored for bankruptcy purposes. If you are married and considering filing bankruptcy on your own, it is a good idea to consult an experienced bankruptcy lawyer before making a final decision. You may not be aware of how your bankruptcy may impact your spouse or how your spouse’s income may impact your bankruptcy.
Spousal Income in an Individual Bankruptcy Case
The Chapter 7 Means Test
If you are filing for Chapter 7 bankruptcy and you share a household with your spouse, his or her income will be considered in the means test calculation. This can present a problem for a bankruptcy filer whose spouse has significant income. Even when the spouse’s income is relatively small, it can tip the household income over the state median income line or shift the disposable income calculation.
However, the Chapter 7 means test allows for an adjustment to ensure that the non-filing spouse’s income is counted only to the extent that such income goes to support the household. The means test form provides for adjustments based on income the non-filing spouse uses to pay separate obligations, such as individual tax debt and the support of separate children. In other words, depending on the expenses in play, it is possible that only part of the non-filing spouse’s income will be considered when determining whether the filing spouse is income-eligible for Chapter 7.
Chapter 13 Repayment Plans
The non-filing spouse’s contribution to the household is also considered for purposes of determining disposable income in a Chapter 13 bankruptcy case. However, as in a Chapter 7 case, adjustments are available when the non-filing spouse is directing part of his or her income to separate obligations and expenses. Thus, the impact a spouse’s income has on the Chapter 13 plan requirements will depend on specifics such as the amount of income and how much of that income is committed to supporting the household.
Joint and Separate Debts
Treatment of some debts and assets in a single-spouse bankruptcy filing differs depending on whether you are filing in a community property state. Since Alabama, Tennessee and Mississippi are all non-community-property states, we will only look at how debts and assets are affected under that system. But, if you are in another state, know that the rules are a bit different in a community property state.
Separate debts of the filing spouse can be included in the bankruptcy with no effect on the non-filing spouse. Similarly, the non-filing spouse’s individual debts are not listed in the bankruptcy and not impacted by the filing. However, joint debts are a bit more complicated.
Joint Debts in Chapter 7
In a Chapter 7 bankruptcy case filed by both spouses together, eligible unsecured debts can be discharged as to both parties. That means that once the debt is discharged, neither spouse has a legal obligation to pay it. When only one spouse files, this plays out differently. The filing spouse may be released from the legal obligation to pay a debt, but the non-filing spouse is not. This means that one spouse could file bankruptcy and include large joint debts, and when the discharge order was entered, the non-filing spouse would still be responsible for 100% of that debt. From a practical standpoint, the household obligations would not have changed–at least, not as to joint debts.
Unless the bankruptcy filing wipes out enough other debt to free up household funds to make those joint debt payments, the couple may find their situation does not improve much. A joint filing, if it is an option, could eliminate that debt for both parties and give the household a fresh start.
Joint Debts in Chapter 13
In a Chapter 13 filing, the non-filing spouse shares in the benefits to a degree. That’s because if the filing spouse includes a joint debt in the Chapter 13 plan and the plan is confirmed, the automatic stay will usually continue to protect the codebtor spouse for as long as the filing spouse makes timely payments and otherwise complies with the plan. For example, if the husband filed for bankruptcy and included $5,000 in joint credit card debt in a five-year repayment plan, the automatic stay would typically remain in effect and prevent the creditor from attempting to collect from the wife–even though she had not filed.
However, if the bankruptcy case fails or if plan payments do not cover 100% of the outstanding debt, the non-filing spouse could still be on the hook to pay the remaining balance.
Joint and Separate Assets in an Individual Bankruptcy Case
Another area of concern for married couples when only one spouse is considering bankruptcy is the treatment of assets–especially in Chapter 7 cases, where non-exempt assets can be sold by the trustee to pay creditors. Here is an example of how a joint asset could be at risk:
Mark and Rebecca have lived in the Birmingham area all their lives and purchased their home more than 20 years ago. The value of their home is $150,000, just under the median home value in the Birmingham metro area. They have an outstanding mortgage debt of $50,000, so their equity in the property is $100,000.
Mark has a lot of unsecured debt in his name alone and wants to file for Chapter 7 bankruptcy. Rebecca has a few debts in her own name and just a few joint debts with Mark, so she does not want to file. The problem is all that equity they built up in the house over the years. While half of the equity–$50,000–belongs to Rebecca for purposes of Mark’s bankruptcy, the other half belongs to him. That means he has a $50,000 asset in the form of equity in the house. Since Alabama’s homestead exemption is just $15,500 for a single filer, Mark has $34,500 in unprotected equity in the house–equity the bankruptcy trustee is entitled to claim for the benefit of creditors.
Of course, in this situation, Mark would likely opt not to file for Chapter 7 bankruptcy. However, a similar situation can arise with any non-exempt property that Mark and Rebecca jointly own.
The Best Way to File for Your Family
There’s no one-size-fits-all answer to “Should I file individually or with my spouse?” and there is no quick and easy response to “How will my bankruptcy impact my spouse?” The best approach for you and your spouse will depend on the specifics of your financial situation, including how much of your debt is shared and whether you have joint assets that would not be exempt. If possible, it is best for both parties to participate in the initial consultation. In one instance, the husband sat in the car because he was determined that he was not going to file. After the wife called him and explained that it would be best for them to file a joint case, he came into the office and decided to move forward immediately!
The first step toward finding the right solution for you is to talk with an experienced bankruptcy lawyer. Bond & Botes offers free consultations to help people like you get the information they need to improve their financial lives. You can schedule your appointment right now by calling 877-581-3396 or filling out the contact form on this page.
Tanya McCalpin is an Associate Attorney at the Bond & Botes Law Offices in Florence and Haleyville, Alabama. She holds a Bachelor of Arts from the University of Alabama, and a Juris Doctorate from Birmingham School of Law. She enjoys serving her bankruptcy clients by helping them problem-solve and breathe a sigh of relief when their stress and worry has been lifted. Read her full bio here.