If you are married and thinking about filing for bankruptcy, one of the first decisions you'll make is whether you'll file an individual case or whether you and your spouse will file together. Each option has advantages and disadvantages, some of which are serious. Read on to learn more about the reasons that favor filing an individual case, and the factors that affect how your spouse's debts and property can be affected even when you file alone.
This article applies primarily to Chapter 7, the type of bankruptcy that might require you to turn over property to pay debts. Some of the downsides of filing a Chapter 7 case by yourself can be managed or eliminated for a married couple when one spouse files a Chapter 13 repayment plan case. A qualified bankruptcy attorney can analyze your circumstances and suggest the best course of action to meet your goals or save you money.
Married couples usually file jointly, but filing as an individual might be a better choice. Whether to file alone is an important decision, because your individual bankruptcy case won't offer your spouse much relief from debt that you own jointly with your spouse, and could still jeopardize your spouse's share of property. Here are some factors that can influence your decision. To learn more, visit Should I File a Joint Bankruptcy With My Spouse?
A spouse who has a small amount of debt will not likely need bankruptcy protection, whether the debt is joint or individual. So why expose your spouse to the trauma and publicity of a bankruptcy? Filing on your own will also help protect your spouse's credit rating, because your bankruptcy case will not appear on your spouse's credit reports.
If you and your spouse used a prenuptial or a postnuptial agreement to separate your debts and property, your spouse should already be insulated from the effects of your bankruptcy case. But the courts are wary of last-minute gifts and transfers to one spouse only, arguably made to protect that property from the gifting spouse's creditors. To protect any such transfers, you'll need to wait a year after the transfer before you file your case.
Inheritances, gifts, and personal injury settlements are your spouse's separate property, which won't be affected by your bankruptcy. Spouses who received any of these assets can rest assured that they are not available to satisfy your debt. But suppose your spouse expects to receive an inheritance, gift, or personal injury settlement? If you file together and your spouse becomes entitled to receive one of these "windfalls" within six months of filing, you would have to turn over any nonexempt amounts.
Owning a business can complicate the bankruptcy. Regardless of the business's legal form (sole proprietorship, partnership, LLC, or corporation), an ownership interest in a business is often a valuable asset. If your spouse joins you in filing bankruptcy, your spouse will probably find it difficult and expensive to protect that asset.
Someone who receives a discharge in a Chapter 7 case must wait eight years to file another Chapter 7 case that will discharge new debt. If the prior case was filed as a Chapter 13, the wait can be as short as two years. Your spouse could choose to file with you anyway and forgo another discharge if other bankruptcy protections, like the automatic stay, are beneficial. Read more about bankruptcy filing restrictions at Multiple Bankruptcy Filings: When Can You File Again?
Your spouse could feel that the time is not right, fear that the bankruptcy will affect employment or personal relationships, or want to avoid disclosing financial transactions. Your spouse might not be able to protect all financial information, however. To determine if you qualify for Chapter 7 bankruptcy, you're required to provide an accurate picture of your household finances. That includes disclosing your nonfiling spouse's income and expenses if you live together. The court could also order that your spouse produce documentation like pay stubs, tax returns, and business records to substantiate those figures.
If you file on your own, the financial consequences for you and your spouse depend on two main factors:
To understand what can happen to the property and debt acquired before and during the marriage when only one spouse files bankruptcy, read the sections below that correspond to the state where you live.
As explained above, couples in community property states might own a mix of community and separate property. In addition, the marriage might have shared debt, and the spouses could each have separate debt. When you file bankruptcy alone, here's what will happen to the marital property, the separate property, and the debts that were incurred before and during the marriage.
For the most part, your spouse's separate property is safe and won't become a part of your bankruptcy. Be careful, though. A bankruptcy trustee could challenge a gift, a prenuptial or postnuptial agreement, a trust, a property sale, or any other transfer you make to your spouse less than a year before you file for bankruptcy. This rule is designed to prevent you from transferring valuable and nonexempt (unprotected) property to your spouse on the eve of bankruptcy. You'll have to disclose any transfers in your bankruptcy paperwork.
As a general rule, it's best that you disclose all your spouse's separate property so that the trustee can verify that it's not part of your bankruptcy.
When you file for bankruptcy in a community property state, the bankruptcy will wipe out your separate debt, but it won't discharge your spouse's separate debt.
All of your property, including community property, becomes a part of your bankruptcy case, even if you file without your spouse. You and your spouse won't lose any community property if you can exempt (protect) its entire value.
If you can't exempt the entire value of a community asset, you could run into trouble if the trustee assigned to your bankruptcy case decides to sell it for your creditors. Your spouse might not be happy about the sale, but your spouse probably can't block your bankruptcy or prevent the sale. Once you file your case, the trustee has the right to the value of the nonexempt property. The trustee will try to partition (divide) the property and sell only your share. When partition isn't practical, the trustee will ask the court for permission to sell the entire asset and pay part of the proceeds to your spouse. Before taking this drastic step, the trustee must convince the court that the benefit of selling the property outweighs the detriment to your spouse.
Exempting all of the equity in community property can be difficult if you file without your spouse. If you live in a state that allows a couple to double the exemption amount, it might make sense for both spouses to file together.
Your spouse's income is also community property. If you and your spouse are living in the same household, you'll probably have to disclose your spouse's income and living expenses in your bankruptcy paperwork so that the court can get a full picture of your family finances.
You and your spouse will share responsibility for most of the debt you incur during your marriage, but the bankruptcy will discharge only your liability. Your spouse will remain responsible for all the community debt. Your spouse does receive an important benefit. After the bankruptcy is over, community property is off limits to discharged creditors. This "phantom" or "community" discharge protects all community property and lasts as long as both spouses are alive and still married. Keep in mind, though, that your spouse's separate property will still be fair game for creditors.
Common law property is often easier to protect than community property when only one spouse files Chapter 7 bankruptcy. On the other hand, the nonfiling spouse in a common law state may end up solely responsible for the couple's joint debt.
Property that you own separately becomes a part of your bankruptcy. Your spouse's separately owned property will not be a part of your bankruptcy.
When you file for bankruptcy in a common law state, your liability will be discharged on your separate debts and any debts you and your spouse owe jointly. Your bankruptcy will not affect your spouse's separate debts. Your spouse will also remain responsible for any debts the two of your owed jointly.
Property Purchased with Assets Earned During the Marriage
In a common law state, your portion of jointly owned property becomes a part of your bankruptcy case. Your spouse's portion is usually safe, but under one scenario it still could be at risk. If your interest in the property is not fully exempt, the trustee might consider selling it and using the proceeds from your part to pay your creditors. Your spouse can oppose the sale but probably can't prevent it. If practical, the trustee will divide the property. If that isn't possible, the trustee will sell the entire piece and reimburse your spouse's portion. But first, the trustee must satisfy the court that the benefit to the creditors outweighs the detriment to your spouse.In a few states, married couples can hold property together in a special way, called "tenancy by the entirety," which allows the couple to own the property as a single marital entity. Depending on the state, tenancies by the entirety can be exempt in bankruptcy when only one spouse files but fair game if both spouses file.
To compare the various types of joint property ownership, visit Joint Property and Concurrent Ownership.
Your bankruptcy will not discharge your spouse's liability for any debts you and your spouse incur together during your marriage.
In any state, applying the law of marital property and marital debt is complicated and fraught with pitfalls. Every bankruptcy case is unique, and predicting the effect of marital property laws in a bankruptcy case requires close attention to many details. An error can be very expensive and take years to overcome. Before you take any action to file a bankruptcy case, transfer property, or pay off debts in anticipation of filing bankruptcy, visit a qualified consumer bankruptcy attorney.