In Chapter 7 and Chapter 13 cases, married couples can choose to file together (a joint case) or apart. If one spouse decides to file a bankruptcy case alone, it can be burdensome to the non-filing spouse. But, if one spouse has the majority of debt, filing alone can preserve the other spouse’s credit rating.
Both Spouses Must Submit Financial Information
It’s common for couples who make too much to qualify for a Chapter 7 bankruptcy to think that they can reduce qualification income if only one spouse files. But it’s not the case. The debtor (the person filing the bankruptcy case) must provide pages of information to the court covering debts, assets, income, household expenses, and financial transactions.
Even if you file alone, your spouse remains a member of your household. Therefore, you must include the non-filing spouse’s income and expenses in the means test calculation (a formula used to determine whether you can afford to make payments through a Chapter 13 repayment plan). The court needs the information to get an accurate picture of your financial situation.
If you’re newly married. This issue comes up in new marriages when one spouse has a lot of old debt but not much income. It might seem unfair to saddle the breadwinner with the spouse's old debt, but the filing spouse benefits from the other's income—and the court realizes this.
If you’re separated or living separately. The rule doesn’t apply if you and your spouse are legally separated or live apart. In that case, your spouse won’t need to provide income and expense information to the court. Even so, if one spouse provides financial support for the other—either court-ordered spousal maintenance or informal contributions to cover some bills—it’s income to the spouse receiving it and an expense to the giver. You’ll need to list it on the bankruptcy paperwork.
Bankruptcy’s Effect on a Codebtor Spouse
While you’re in bankruptcy, a court order called the automatic stay protects you by stopping creditors from taking collection actions. Whether or not the stay extends to a codebtor (someone also responsible for a debt) will depend on the chapter you file.
In a Chapter 7 case. The stay doesn’t protect codebtors in a Chapter 7 case. Creditors can continue to collect against a non-filing spouse.
In a Chapter 13 case. By contrast, the stay protects codebtors while you’re paying into in a Chapter 13 repayment plan. The codebtor stay provides a powerful incentive to file a Chapter 13 case when you want to protect a cosigner or someone else who is obligated to pay the debt, as well.
How Filing Will Affect Property
Filing in one of the community property states—Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin (plus Alaska, which has special opt-in rules, and Puerto Rico)—can also affect your spouse. Each owns all of the property acquired during the marriage and are equally liable for any debt entered into during the marriage. Therefore, the filing spouse will need to be sure there are sufficient bankruptcy exemptions to protect the filing spouse’s separate property.
However, in some community property states, a filing by one spouse will wipe out all community debt. But it depends on the state law. In other community property states, the non-filing spouse will remain responsible for community debt.
In the remaining “common law” states, spouses can be jointly liable for debt, but they can also have separate debt for which the other spouse isn’t responsible. Likewise, spouses can own property together or separately. If you file your bankruptcy case in a common law state, your discharge will include your property and apply to your debt.
Because these issues get complicated quickly, and the outcome is state specific, to best preserve your assets you should consult with a knowledgeable bankruptcy attorney in your area.
Questions for your Attorney
- My spouse wants to file bankruptcy to wipe out some old debt. Is there anything I can do to protect my private financial information?
- In my state, is it appropriate for my spouse and I to divide our property before I file for bankruptcy?
- In our property settlement, my ex-husband is supposed to pay our credit card bills, mortgage, and car payments. What will happen if he files for bankruptcy?