Implications Of Filing For Bankruptcy On Spouse
HOW DOES FILING BANKRCUPTY AFFECT MY SPOUSE?
Joint Debts In Bankruptcy
Debt problems cause stress for the entire family. One of the common concerns is how will bankruptcy affect my spouse if I declare personal bankruptcy? Do creditors pursue your spouse? Will it affect their credit rating?
To understand how bankruptcy will affect your spouse, it is important to understand the difference between joint debt and personal debts.
Personal Debts
Your bankruptcy only affects your debts. As long as your debts belong solely to you, then claiming bankruptcy should have no impact on your spouse or their credit rating, but sometimes the answer is not quite that simple.
Joint Debts
If your spouse has not co-signed or guaranteed any of your debts then those debts belong solely to you.
However, if they have guaranteed or co-signed any of your debts, those debts are no longer just yours. Now your spouse will become fully liable if you file for bankruptcy. Your creditors will pursue your spouse for full payments, even though your bankruptcy will eliminate your responsibility to repay the debt.
Does my bankruptcy affect my spouse?
A married person in overwhelming debt, and who has to file bankruptcy, starts wondering if bankruptcy should be filed with or without the spouse. They worry about how their decision impacts their family, and are especially worried about its implications on his or her spouse and their credit report. Some even worry about their spouse losing their job or that both partners are obligated to file for bankruptcy. They usually end up having these questions running in their head, and look for answers to them:
Will filing for bankruptcy affect my spouse's credit?
Answer: Mostly like NO. This is the biggest concern of individuals filing for bankruptcy. However everyone, married and single, have separate credit bureau files connected to their social security number. So as long as the spouse isn't a co-debtor, or legally liable for the same debt, filing for bankruptcy to eliminate debt won't affect the spouse's credit score. But if the couple has joint debts and if the non-filing spouse is a co-debtor then they have more to worry about besides a negative report on their credit score. This is because when a spouse files for a Chapter 7 bankruptcy to discharge the joint debt, there's a chance of it appearing on the other spouse's credit report. So the creditor can take immediate action against the non-filing spouse. Besides, creditors will be notified about the spouse's bankruptcy status and may bother the non-filing spouse to collect joint debts.
Chapter 13 bankruptcies have a safety clause called the co-debtor stay. This clause can in many situations protect a co-debtor who doesn't file for bankruptcy.
The clause prohibits creditors from pursuing co-debtors, like the non-filing spouse, during bankruptcy. However, the creditors can approach the court and ask them to lift the stay if the joint debt isn't repaid through their repayment plan. It's an experienced bankruptcy lawyer who will be able to give them the best advice about this.
Does my spouse have to file for bankruptcy because I am filing for one?
Most married couples assume that the other spouse is obligated to file for bankruptcy if one spouse files for it. This is not always true because it depends on the case.
It is generally better to file jointly for a Chapter 7 bankruptcy if both spouses owe money to the same creditor. However, a joint filing isn't necessary for Chapter 13 bankruptcies, or where one only one spouse is liable for all the debt, especially for debts incurred before marriage. In these cases, it's sensible for only the debtor to file for bankruptcy.
Will both I and my spouse lose our jobs after filing for bankruptcy?
No. In fact, bankruptcy laws forbid employers from firing either spouse because of filing for bankruptcy. Anyway, most employers won't even be aware of the filing. If they do find out, they are usually relieved that their employee's financial condition is finally improving. However, a bankruptcy attorney should be contacted immediately if either spouse is fired because of filing for bankruptcy.
What happens to our property?
Filing for bankruptcy won't affect any property the non-filing spouse individually owns. However, if they have joint assets, the bankruptcy effects depend on whether the couple lives in a common law property state or a community property state.
Common law property states
In case of couples living in common law property states, all individual assets and the spouse's share of interests in any jointly owned properties (usually 50% unless otherwise specified), are considered to be part of their bankruptcy estate. Any property the non-filing spouse owns in his or her name is usually not at risk.
In case of a Chapter 7 bankruptcy, the bankruptcy trustee can sell the entire jointly owned asset if the property is indivisible and the filing spouse can't exempt their share of interests. In case the property is sold, the non-filing spouse receives the value of their interest in the property. The filing spouse's portion of the non-exempt proceeds will then be used to repay his or her creditors.
Community property states
In the case of community property states, most assets, and income earned by either spouse during marriage, is considered to be community property. With both spouses owning equal shares on the property, the property is considered to be their bankruptcy estate's property and can be used to repay their debts. So filing for bankruptcy can affect the non-filing spouse if most of their joint assets are community properties. A bankruptcy attorney will be able to enlighten give more information about what happens to joint property during bankruptcy.
Can creditors pursue my spouse if I file for bankruptcy?
Answer: Maybe; but only if the debt is jointly held Yes because filing for bankruptcy only eliminates the filing spouse's personal liability for debts discharged. It doesn't eliminate the non-filing spouse's obligation to repay his or her debts or their joint debts. This is why creditors can come after the non-filing spouse to collect their joint debts. There is an exception if couples live in a community property state, and they have discharged their joint debts. In this case, creditors can only pursue the non-filing spouse's separate property and not any marital community property after the bankruptcy. With most of the property acquired during a marriage being community property, including their income, the non-filing spouse receives a discharge and joint debt benefits. This exception is called phantom discharge. There's also the co-debtor stay which can benefit the non-filing spouse in case of a chapter 13 bankruptcy.
Should we file for bankruptcy together?
Once again, there is no steadfast rule stating that both spouses have to file for bankruptcy together. It is decided based on the individual case and scenario, and with the help of a bankruptcy lawyer. While it's better to file for bankruptcy with the spouse in some situations, it's not in others. Here are some scenarios describing when it's better, and when it's not better to file for bankruptcy together.
All or most of the debt is in one spouse's name
There are various reasons for the debt to lie in one spouse's name in a marriage, and the person with little or no debt doesn't want to file for bankruptcy if it's unnecessary. Usually, the person in debt may feel guilty about the debt and doesn't want to harm the other person by forcing them to file for bankruptcy.
- i. New marriage
- ii. Not divulging ones actual amount of debt
- iii. A failing business
- iv. Uncontrolled use of credit
- v. Other spouse's weak credit score
One reason for only one spouse being in debt is in a relatively new marriage where the couple realizes that the spouse's debt is hurting their joint financial lives and marriage.
Sometimes the person in debt may not have been honest with the amount of the debt he or she was in, and the other spouse eventually finds out.
In some cases, it may because one of the spouses has a failing business, and in a marriage, most of the business debt lies in the business operating spouse's name.
There is also the possibility that the spouse in debt had continued to use credit without the other spouse's knowledge, which had led to uncontrolled debt.
In some other cases, one spouse ends up in debt of their home or car loan because the other spouse's credit score wasn't strong enough to get a loan sanctioned. Whatever the reason may be for most of the debt being in one spouse's name, it's only through a thorough analysis that it's possible to figure out who's liable for the debts. Non-filing spouse is not always free from debts
It's not always that the non-filing spouse is not legally liable for some debts, and can just opt to not file for bankruptcy. For example, an authorized credit card user may or may not create liability.
In case of a new marriage, any debts incurred before the marriage are usually owed only by the spouse who incurred it. However, sometimes, the other spouse ends up liable for their debts. Some states' laws even maintain that the spouse who doesn't file the debt papers or participate in the purchase or transaction is still liable for the debt.
Besides, according to community property laws, joint liability is easily created. Then again, sometimes there may be no complications at all. This is why the non-filing spouse has to first clearly ascertain if he or she will remain liable for any debts if they do not join in the bankruptcy before opting to do so.
A bankruptcy lawyer is the best person to help them assess their case, and make the right judgment.
To preserve the other spouse's credit record
Another common reason to file bankruptcy in only one spouse's name is to protect the other's credit record. It's actually a good thing to do because if it works out, the couple can benefit beaus of the non-filing spouse's access to credit for the household's good. Besides, the non-filing spouse can also help the filing spouse re-establish their credit rating by letting him or her co-sign for new debts. This is why bankruptcy lawyers suggest leaving one spouse to not file for bankruptcy if the filing spouse has a small amount of debt. There are some contradictions here, especially if the couple has a few joint debts, like a home mortgage or vehicle loan, which they intend to maintain and pay outside of the bankruptcy. So though credit reporting agencies aren't supposed to refer a co-debtor's bankruptcy filing in the non-filers credit reports, sometimes mistakes may occur, and create complications.
A bankruptcy attorney is the best person to approach for help here. It's also important that the non-filing spouse makes it a habit to review their credit report before the other spouse files for bankruptcy, and regularly after that, to ensure there are no direct or indirect references to the bankruptcy case in it.
Cases where the other spouse owns 100% of important assets
Assets also come into play during bankruptcy because though the debt may be in a single spouse's name, the assets may be in both names. The non-filing spouse usually doesn't want to file for bankruptcy because they have a legitimate worry that one of his or her assets can get lost if they also file for bankruptcy. He or she hopes to keep his or her assets out of the bankruptcy trustee's clutches by not filing for bankruptcy. The deciding factor here is to ascertain how well their assets are, or are not protected by property exemptions. Property exemptions are the list of properties the creditors or bankruptcy trustees cannot touch.
Just going through the list of exemptions to find out of the assets are covered or not, or if it covers the asset's full value, is not enough. There are a few other possible scenarios to consider.
a) The first is that than half of the states let debtors choose between using the state or federal exemptions, where one protects the concerned asset better.
b) The second scenario is that if both spouses file for bankruptcy, some schemes double certain property exemption amounts. Some exception schemes don't increase it at all while others increase it a little.
c) The third scenario is that in some states, the spouse doesn't qualify for state exemptions if they haven't lived long enough in the state. There are however usually have special rules about when the spouse can benefit from state homestead exemption.
d) The fourth scenario is where the non-filing souse partially owns the asset, or owns it with either the other spouse or some other family members because of perhaps inheritance.
e) In the fifth scenario, there is the risk, and the possibility of community property states making things even more complicated.
f) The last scenario is that smart pre-bankruptcy planning or filing Chapter 13 ‘adjustment of debts' can help save the one or two assets which are at risk.
So there are so many possible complications and scenarios where the reluctant spouse may or may not worry about their assets risks upon filing for bankruptcy. This is where a bankruptcy lawyer will be able to provide the right guidance, on whether it's better to jointly file for bankruptcy or not.
• Cases where the couple is anticipating a divorce
Filing for bankruptcy may be the best thing to do if the couple is anticipating divorce because they can reap its financial relief. And most couples feel it's better to file for it together if the bankruptcy filing comes first. They can save on filing and attorney fees, and have much less to argue about during the divorce proceedings. However, this is not always the best thing to do, because of the following reasons.
i. It's not advisable to file for a joint Chapter 7 bankruptcy case if the couple is anticipating a divorce. They have to first discuss and ascertain from their individual attorneys if filing for joint bankruptcy is the right thing for them or not.
ii. Sometimes filing for joint bankruptcy will not be in one or the other's interests, like opting to file for one after the divorce, because the couple will separate, and won't be filing a joint Chapter 7 case.
iii. It is not at all advised for couples contemplating divorce to file a joint Chapter 13 bankruptcy. Remember, a Chapter 13 bankruptcy case takes 3 to 5 years to complete and ends up as two separate Chapter 13 or Chapter 7 cases, or one of each after the divorce. This only leads to unnecessary administrative headache and costs, which is why a joint filing for Chapter 13 bankruptcy is a bad idea for couples contemplating divorce.