You can file bankruptcy without your spouse, but sometimes you should file together.
Your spouse does not have to file bankruptcy. You can always file bankruptcy without your spouse, but whether they should file depends on the circumstances. Here are some of the most common situations that may make you question whether or not to file with your spouse.
All (or Most) Debts are in One Spouse’s Name
This happens often either in a relatively new marriage, or one in which one of the spouses had operated a failing business. The person with little or no debt doesn’t want to participate in filing bankruptcy if it’s not necessary to do so. And often the person with the debt, out of guilt or sometimes more noble motives, wants to avoid harming the other person any further by dragging him or her into a bankruptcy case.
In a newer marriage, the couple may come to realize that the debts of one of them are now hurting their joint financial lives. Possibly the financial stress is jeopardizing the marriage itself. That is especially true if the person with the debts either was not candid about the amount of debts he or she was bringing into the marriage, or has continued to use credit within the marriage without the full knowledge of the other spouse.
Sometimes one spouse never had a credit score adequate to be approved for debts like car loans and home mortgages, so all the debt will be in the other spouse’s name.
In a marriage in which one of the spouses has been operating a business, there’s more of a tendency for a large portion of the debt to be in that business-operating spouse’s name.
Whatever the context, determining whether to file bankruptcy for just one spouse requires a thorough analysis to find out who is liable on each of the debts. If there is joint liability, the creditor can go after the non-filing spouse for the full amount. And even if the non-filing spouse does not think he or she is legally liable on some debts, you have to double check before they opt out of being included in the bankruptcy filing.
It is often more difficult than you’d think to know for sure whether one spouse is or is not liable on a debt. Being an authorized user sometimes creates liability, and sometimes doesn’t.
Often, it IS pretty clear. Business debts are generally only the obligation of the business owner (assuming that only that spouse owns the business). And in a newer marriage, debts that pre-date the marriage are usually only owed by the person who incurred it.*
The non-filing spouse can only make an informed decision about whether or not to join in the bankruptcy case if he or she clearly knows what, if any, debts he or she would remain liable for if he or she does not join in.
Preserving the Other Spouse’s Credit Record
A common reason given for one spouse not wanting to file is to protect his or her credit record. That’s a sensible enough goal. And not only for the non-filing spouse. If it works the couple itself could benefit through the non-filing spouse’s subsequent access to credit on behalf of their household. That non-filing spouse may even be able to help the filing spouse re-establish his or her good credit through co-signing of new debts and such. Many times when one spouse has a small amount of debt, we suggest leaving them out of the bankruptcy.
But be careful with assumptions about being able to keep the other’s bankruptcy filing completely out of the non-filer’s credit record. This is especially if you have a joint debt or two, including ones that you intend to continue to pay and keep “outside the bankruptcy” case, such as a home mortgage or vehicle loan. Although credit reporting agencies are not supposed to refer to a co-debtor’s bankruptcy filing in the non-filer’s credit reports, don’t simply assume that will happen appropriately. Mistakes like this happen a lot, and your attorney can tell you how to address it.
So it’s all the more important for the non-filing spouse to review his or her credit report before the other spouse’s bankruptcy is filed and then very regularly thereafter to make sure there’s no reference, directly or indirectly, to the bankruptcy case.
Important Asset(s) Are 100% Owned by Other Spouse
Bankruptcy involves much more than just debts; assets can play a major role. And not wanting one spouse to file bankruptcy can be motivated by a desire to keep that spouse’s assets out of the bankruptcy trustee’s clutches.
The primary step here is to find out how well the assets in question are or are not protected by property exemptions—the lists of properties that can’t be touched by creditors or bankruptcy trustees. In other words, does the potential non-filing spouse actually have a legitimate concern that something that he or she owns is in fact at risk of being lost if he or she joins in the bankruptcy case?
This is a so much more to this than merely going down a list of exemptions to see if the asset in question is covered, and if so whether it covers the full value of the asset.
First, in some states (although a little less than half) you have a choice between using the state’s exemptions or the federal one, so one will likely be better at protecting the asset of concern. Second, some exemption schemes double certain property exemption amounts when two spouses file a case, some do not increase the amount at all, while some increase it somewhat. Third, you do not qualify for the exemptions available in a state until you’ve lived there long enough, with special rules about when you can benefit from that state’s homestead exemption. Fourth, additional considerations come into play if the reluctant-to-file spouse’s ownership interest is a partial one, owning the asset(s) together with either the other spouse or with other family members (such as from an inheritance). Fifth, community property states add a whole additional layer of complications to this. And finally, even if there is an asset or two at risk, there can be many ways of avoiding that risk, such as through smart pre-bankruptcy planning or by filing a Chapter 13 “adjustment of debts.”
The bottom line on this is that the reluctant spouse may or may not have a valid concern about the risk to his or her asset if he or she joined in the bankruptcy case. It may be quite easy to determine whether that concern makes sense, but it may well also take some careful lawyering to figure this out, and then to chart the best way forward.
Anticipating a Divorce
Sometimes bankruptcy can be good financial planning when anticipating divorce. If it’s clear, both that you will be getting divorced, and that you need the financial relief of a bankruptcy, which should come first—and if the bankruptcy is first, should you file with your spouse or by yourself? Most of the time it is a good idea to file together if you can stomach it. You save on filing and attorney fees, and you have less to argue about (so you spend less on legal fees) in the divorce. But, this isn’t always true.
The overly simplified answer for the purpose of this already long blog post is as follows:
- Do not file a joint Chapter 7 “straight bankruptcy” case with your spouse in anticipation of a divorce without BOTH of you getting independent legal advice from separate attorneys about whether doing so would truly be in each of your self-interests.
- Be prepared for the possibility that it would not be in one or the other of your self-interests to file jointly, or to file ahead of the divorce, with the result that you would not be filing a joint Chapter 7 case.
- In virtually NO circumstances would it make sense to file a joint Chapter 13 case in contemplation of a divorce—they take three to five years to complete, and at the time of your divorce would have to turn that case into two separate Chapter 13 cases, or into two Chapter 7 ones, or one of each, usually causing enough of an administrative headache and cost to make filing a joint Chapter 13 case a bad idea.
*But even there the other spouse may become liable in various ways. As for debts incurred during the marriage, under many state’s laws the spouse who did not sign the debt papers or did not otherwise participate in the purchase or transaction can still be liable for the debt. And beyond that, in community property states joint liability is even more easily created.