When a spouse is involved, filing bankruptcy can be significantly more complicated than filing a simple individual bankruptcy.
In many cases, a married couple may find themselves entering into complex legal territory when bankruptcy is introduced into the equation. There are four major factors that affect the decision to file bankruptcy for a married couple where one or both spouses are facing bankruptcy.
WHEN SHOULD YOU FILE?
Bankruptcy Filed Before Marriage. When an individual files for personal bankruptcy before his or her marriage, any liens or judgments against the debtor will typically be isolated to the debtor and will not affect the new spouse in any way. Likewise, the spouse’s assets are usually unaffected. New applications for joint credit, however, will be affected by the past bankruptcy filing.
Bankruptcy Filed During a Marriage. If a person is currently married and files an individual Chapter 7 bankruptcy, that person’s household income will be subjected to a “means test” that determines whether or not he or she qualifies for a Chapter 7. The means test requires that your total combined household income be considered, regardless of the spouses’ intent to file jointly or individually. Your spouse’s income could therefore be the tipping point that decides whether you will qualify for Chapter 7, or will have to enter a Chapter 13 and repay some percentage of your debts over time. Depending on what percentage of debt is co-owned by both spouses, a married couple may decide to file a joint bankruptcy, during which all of the debts and all of the assets of both spouses will be subject to the bankruptcy process.
Bankruptcy Filed After a Divorce. Bankruptcy filings following divorce are common. Divorce proceedings are often complicated, life-altering events. Bankruptcy can sometimes allow a person to get his or her finances back on track after the devastating effects of a failed marriage. In most cases, joint property is divided during the divorce and is considered the separate property of each individual from the time that the divorce is finalized. Like assets, joint debts are also divided by the divorce courts (or by a divorce settlement), and the settlement or order will determine who will be personally liable for joint debts after the divorce.
WHO OWNS THE DEBT?
Individual vs. Joint Bankruptcy Filing. One of the biggest concerns is that when individuals file for bankruptcy on their own, their non-filing spouses may become a target of creditors. However, while opting for joint bankruptcy filing offers more protections for each spouse, it may be unnecessary for both parties to file. The decision whether to file a joint or individual petition will depend on numerous factors, including the percentage of joint-to-individual debt, the type and sources of income, and the state exemption laws for the jurisdiction in which the couple resides.
Joint Debts and Debts During Marriage. How and when debts are acquired strongly affects whether a joint or individual bankruptcy is appropriate. Certain debts accumulated during marriage will be assumed to be owned by both spouses, even though the legal act of marriage does not establish automatic shared liability on debt. Generally speaking, a non-filing spouse will be responsible for debts if he or she has signed or co-signed an agreement to incur and pay them. If a spouse files an individual bankruptcy, the non-filing spouse will continue to be liable on any joint liabilities or common debt. Moreover, the protections of bankruptcy’s automatic stay are not extended to a non-filing spouse, which means that creditors can still pursue the non-filing spouse while the filing spouse is under bankruptcy protection.
WHO OWNS THE ASSETS?
Both Washington, D.C. and Virginia are “equitable distribution” states, which means that the bankruptcy estate will consist of all of the debtor’s separate property, as well as half of the jointly-owned marital property. While all of the non-filing spouse’s separate property acquired before the marriage is still safe, any community property is put at risk in bankruptcy to the extent that the bankruptcy debtor has an interest.
HOW WILL MY BANKRUPTCY AFFECT MY SPOUSE’S CREDIT?
It is natural to want to protect your spouse’s credit from damage related to your bankruptcy filing. As a preliminary point, every person has his or her own individual credit report and individual credit score. Nonetheless, creditors of jointly-owned debt will sometimes report the bankruptcy filing on the non-filing individual’s report to show that the non-filing spouse is now solely liable for the formerly co-owned debt. In turn, this may affect the non-filing spouse’s debt-to-asset ratio, as well, even though both co-debtors were jointly and severally liable on the debt before the filing spouse’s bankruptcy.