A married couple considering filing for bankruptcy must decide whether a joint petition (filing together) is the right approach, or whether it would be best for one spouse to file alone. In most cases, a joint petition works well when both spouses are responsible for the majority of the debt. However, if most (or all) debt is in the name of one spouse, an individual filing could be a better choice. In this article, you’ll learn how issues, such as the amount of property owned by each spouse, can impact a couple’s filing decision.
Understanding How Bankruptcy Works
The two most commonly-filed bankruptcy chapters each provide different benefits. Here’s a brief explanation of both types.
Chapter 7 Bankruptcy
This chapter quickly wipes out (discharges) certain types of debt, such as credit card balances, medical bills, and personal loans. You don’t have to repay your creditors, and you'll be allowed to keep (exempt) some—if not all—of your property. However, if the value of the assets that you’d lose—called “nonexempt property”—would fully repay your debt, filing for bankruptcy wouldn’t make sense.
Not everyone can use this bankruptcy type due to its financial qualification limits. Specifically, you cannot make more than the median income of your state of residence (for your family size). And, you ’ll report both spouses’ income—even if only one spouse files (unless you’re separated).
Also, bankruptcy will impact your credit. A Chapter 7 bankruptcy filing will stay on your credit report for ten years.
Chapter 13 Bankruptcy
If your income exceeds the Chapter 7 guidelines, or if you don’t want to lose property, a Chapter 13 bankruptcy might be a good fit.
You’ll pay your discretionary income to your creditors in a three- to five-year repayment plan—and your plan must comply with applicable payment rules. For instance, you’ll pay the value of any nonexempt property that you keep; as well as the full amount you owe on certain debts, such as past due taxes and child or spousal support arrearages.
Unlike Chapter 7 bankruptcy, a Chapter 13 case might make sense even if you'd fully repay all of your debt. You can use it to save a house or a car—it will stop an impending collection action, such as a foreclosure or wage garnishment—and spread out your arrearages over the duration of the plan.
A Chapter 13 case will impact your credit score for seven years.
(Read Choosing the Type of Bankruptcy: Chapter 7 or 13 to find out more.)
Deciding Whether to File a Joint or Individual Petition
The following questions will help you determine whether an individual or joint Chapter 7 or 13 filing would be best:
- How much debt will get wiped out?
- How much property will I lose?
- Do I need to file to stop a collection action?
- Will the debt reduction outweigh any credit score damage?
You’ll likely have to consider issues particular to your case before answering these general questions (more below).
When a Joint Filing Might Be Best
The following factors might support a joint filing:
- You’re both responsible for the debt. You’ll want to wipe out both spouses' debt obligation; otherwise, one spouse will remain subject to collections. (Exceptions might apply in a Chapter 13 case.)
- You don’t have much property. If neither spouse owns separate property, and you can protect all of the marital assets, you won’t have to worry about losing (or paying for) property.
- You live in a community property state. Each spouse is responsible for debt acquired during the marriage in a community property state. If all of the marital debt is in one spouse’s name, an attorney might advise you that creditors rarely go after a nonfiling spouse who isn’t a joint account owner. But, to be safe, you might consider a joint filing to be sure that the obligation is wiped out for both spouses. You’ll likely have to decide the level of risk you’re willing to assume.
When an Individual Filing Might Be Best
These factors might suggest that it would be best for one spouse to file for bankruptcy.
- The majority of the debt is in one spouse’s name. If all debt is in one spouse’s name (and that spouse is solely responsible for payment), there likely won’t be a reason for both to file.
- One spouse has significant nonexempt assets. In bankruptcy, the trustee will sell assets at a fire sale before paying off debt. A spouse with significant assets might be better served by personally selling property and using the funds to negotiate down payments with creditors.
- One spouse has good credit. Keeping credit intact can provide a financial buffer by allowing you to make necessary credit purchases (such as a vehicle) at a reduced rate of interest in the future.
- Your separated spouse won’t cooperate. If you’re separated and facing a collection action, such as a wage garnishment, you might need to file on your own to protect your income. Be aware that jointly-owned property can be sold and that your debt issues might not be fully resolved if you have a pending family law action. (For more information, read Personal Bankruptcy and Divorce.)
- You own property as tenants by the entirety. If you and your spouse own property as tenants by the entirety in a state that excludes such property when only one spouse files, an individual filing will likely be your best bet. Filing jointly could cause you to lose your home if you have significant nonexempt equity.
- One spouse previously filed for bankruptcy. A period of years must pass before the spouse who filed previously will be eligible to receive another discharge. (Read How Often Can I File for Bankruptcy?)
- One spouse committed fraud. Bankruptcy requires a transparent accounting of all debt and assets. It’s best to avoid filing if there’s a concern about a possible accusation of fraud or concealment.
- The spouses’ combined debt is too high for a Chapter 13 case. Your total debt cannot exceed certain limitations in a Chapter 13 case. You might be able to get around the limits if one spouse files instead. (For the current amounts, see Do I Qualify to File for Chapter 13 Bankruptcy?)
Seek Professional Advice
Each bankruptcy case is unique. The general information in this article cannot address all potential issues. A knowledgeable bankruptcy attorney will be in the best position to help you decide the right approach for you.
Questions for Your Attorney
- Will we stand to lose property if we file a joint Chapter 7 case?
- Are we each responsible for the other’s debt since we live in a community property state?
- Do you suggest that we file together or separately?