Spouses are allowed to jointly file a single bankruptcy case together. This is often advantageous to both spouses when they both have a significant amount of debt, as they do not have to incur the additional time and expense of filing separate cases. However, it is not uncommon for only one spouse to file for bankruptcy, while the other does not. But what is the impact of the bankruptcy upon the spouse who is filing for bankruptcy, and upon the spouse who decides not to file?
Sometimes a spouse will be concerned that the fact the other spouse is filing for bankruptcy will negatively impact them. This is very rarely true. For example, a downside to filing bankruptcy is the temporary negative impact it will have upon that person’s credit score upon receiving their discharge (although the long-term positive effects of filing for bankruptcy almost always greatly outweigh any such short-term negative consequences). It’s a common misconception that the non-filing spouse’s credit score, and ability to secure future financing, will also be negatively affected. This is not true. The spouse who does not file bankruptcy is not impacted, at all, by the fact that the other spouse filed bankruptcy, in terms of their individual credit score or ability to secure future financing. It is notable however, that when spouses have joint debt, the non-filing spouse will remain completely liable for that debt, while the spouse who files for bankruptcy will be relieved of liability upon receipt of their discharge.
Another concern that non-filing spouses often have is how involved they have to be in the process of their spouse’s bankruptcy case. When a person files for bankruptcy, they must disclose a great deal of sensitive financial information. For example, they must provide documentation including income, bank statements, and tax returns. They must also disclose information such as all their assets, all their debts/creditors, and any relevant financial transactions they engaged in prior to filing their case. However, this information is particular only to the spouse who files for bankruptcy. The non-filing spouse is not required to also disclose information, personal only to them, or provide their own separate documents. However, to the extent that the spouses share certain documents (i.e. joint bank statements) or property (i.e. a car on which both spouses are titled) those documents/property are subject to being disclosed and made known to the bankruptcy trustee/court. Furthermore, the non-filing spouse is generally not required to participate and engage in their spouses bankruptcy proceeding, such as attending the creditor’s meeting, being present at any court hearings (which are uncommon in bankruptcy), or providing any further information/documentation to the bankruptcy court/trustee than is relevant to the debtor’ s case. One notable exception to this is that non-filing spouses are routinely required to provide paystubs to the bankruptcy for their examination. This is because, under bankruptcy law, spouses, unless living in separate households, are presumed to share income to contribute to shared living expenses. This is relevant for a couple of reasons. First, only debtors whose total gross household income (i.e. the combined income of themselves and the non-filing spouse), is less than the State median income, based on the total number of people in their household, are allowed to file a chapter 7 bankruptcy. Debtors who earn above the median income must file a chapter 13 case, unless they can prove their actual disposable income, after deducting necessary living expenses, is insufficient to allow them to afford a chapter 13 plan (not easy to do). Second, if the debtor files a chapter 13 case, the non-filing spouse’s income is important because the debtor, is required to contribute all of their disposable income, each month to pay their creditors. Obviously, the higher the joint income that the debtor and non-filing spouse earn, the higher the payment will likely be.
Most, if not all, of the property owned individually by the spouse who files for bankruptcy is considered property of the “bankruptcy estate” when they file their case. In a chapter 7 case, property of the bankruptcy estate is divided into exempt property (legally protected from being taken to pay creditors), and non-exempt property (subject to being taken by the trustee to pay creditors). In a chapter 13 case, any non-exempt property is not subject to being taken by the trustee, but rather its value represents the minimum amount that must be paid to the unsecured creditors during the debtor’s repayment plan. All of the property owned individually by the non-filing spouse is not part of the bankruptcy estate. Some may be tempted to think that property acquired during the marriage is jointly-owned “marital property,” even when it’s separately titled to an individual spouse only. However, the Court has held that this is not the case, and the concept of jointly-owned marital property is only legally relevant in the context of a divorce, not in a bankruptcy case. When spouses own property jointly, the interest that the spouse who is filing for bankruptcy has in the property is considered property of the bankruptcy estate, while the non-filing spouse’s own interest is not part of the bankruptcy estate. For example, if spouses are both on a car title, deed to real estate, a joint bank account, etc., they each have a one-half interest (50%) in each asset. While the non-filing spouse’s interest is not considered part of the bankruptcy estate, in some circumstances a chapter 7 bankruptcy trustee may be able to take the entire jointly owned property to sell to pay creditors. These situations are pretty rare, however, and in any event, the trustee is required to pay the non-filing spouse the value of their interest in the property when the property is sold.
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In summary, while there are some circumstances in which a non-filing spouse may need to be involved in their spouse’s bankruptcy case, or have rights that may be impacted by the bankruptcy (i.e. property rights), for the most part they not affected by the bankruptcy. Only in very rare circumstances is a non-filing spouse negatively impacted by their spouse’s bankruptcy. This is a brief and generalized overview of a complex topic. In order to better understand how a bankruptcy will impact you and your spouse, you should talk to an experienced bankruptcy attorney before deciding whether to file a bankruptcy case. See us at LifeBackLaw.com!
