Filing bankruptcy with or without your spouse affects the discharge of debts you each receive, and also affects whether you file under Chapter 7 or 13.
Continuing from the last blog:
- There are consequences to filing separately or together, consequences affecting:
- the discharge of your debts.
The last blog was about what happens to a spouse who doesn’t file bankruptcy when the other spouse does, specifically as to the “automatic stay,” the immediate protection from creditor collection activity. In a nutshell, there is NO protection from joint creditors for the non-filing spouse in Chapter 7, while there IS some important but limited protection in Chapter 13 through the “co-debtor stay.”
The “automatic stay” is temporary protection that goes into effect at the beginning of and can last the length of the case. The “discharge”—the permanent legal write-off of a debt which is the topic of today’s blog—happens at the end of either a Chapter 7 or Chapter 13 case.
Debts Are Individual
A debt is an individual liability. Discharging a debt in bankruptcy is not so much a destruction of that debt as a legal pronouncement that an individual is no longer liable on that debt.
Each person owes a debt individually—we are not automatically liable for our spouse’s debts. So if ALL of a couple’s debts are owed by one spouse and only that spouse, then a bankruptcy by that spouse will leave the couple with no debts (assuming the debts are of the kind that can be discharged).
Chapter 7 Discharges Debts Only of the Filing Spouse(s)
Much more common is the situation in which two spouses each have some individual debts and some joint debts.
If they file a JOINT Chapter 7 straight bankruptcy, at the completion of the case their debts will be discharged (legally written off). That includes debts that each spouse owes individually, as well as those for which they are both legally liable.
If only ONE of two spouses files a Chapter 7 case, only that spouse’s debts will be discharged. That includes debts that only that spouse owes individually, as well as his or her obligation on any debts owed jointly with his or her spouse. But the non-filing spouse’s debts will not be discharged. And that includes debts that only that spouse owes individually, as well as his or her obligation on any debts owed jointly with his or her spouse.
Distinguishing Individual and Joint Debts
What this means is that one spouse should not file without the other unless they know exactly how much debt the non-filing spouse is legally liable for—both his or her separate debt and their joint debt.
This is not always obvious. A seemingly non-liable spouse can in fact be legally liable on a debt in numerous possible ways. A creditor’s monthly bill that is addressed to only one spouse does not necessarily mean that the other spouse did not sign and become obligated under the original loan agreement. Under certain states’ laws a spouse is obligated for the other spouse’s debts under certain circumstances. Also, specific creditors—such as the IRS—are favored with special laws creating liability for the other spouse. So both spouses’ debts need to be reviewed carefully to see who is liable on each contractually and as a matter of law.
There’s No “Co-Debtor Discharge” in Chapter 13
There is no discharge of a non-filing spouse’s liability analogous to the special “co-debtor stay” of Chapter 13. The filing spouse has the opportunity to protect the non-filing spouse during the course of the 3-to-5-year Chapter 13 case through the “co-debtor stay,” but if the debt is not paid in full during the case then the creditor can pursue the non-filing spouse once the case is over. That’s true even though the filing spouse’s liability for the same debt is discharged at the end of that Chapter 13 case.
Take as an example a husband and wife owing $5,000 on a credit card that they both thought only the husband was liable on because they understood it was tied to his business that failed. They’d forgotten that long ago they had both signed the credit card application. If only the husband files a Chapter 13 case, the “co-debtor stay” would immediately prevent the credit card creditor from pursuing the wife. That creditor may not bother to object to the “co-debtor stay.” Then at the end of the husband’s Chapter 13 case, any of his remaining liability on that credit card debt (beyond whatever portion was paid through his plan, if any) would be discharged, and his case completed and closed. That would terminate the “co-debtor stay,” allowing the creditor to pursue the wife for the full $5,000 debt, plus years of interest and late charges.
The Bottom Line
Be very cautious about filing a separate bankruptcy case—Chapter 7 or 13—without your spouse. Discuss your debts thoroughly with your attorney, getting strong verification that the non-filing spouse is liable neither contractually nor by operation of law on debts. Use the “co-debtor stay” to protect the non-filing spouse on a limited joint debt(s), but only to give the filing spouse time to pay off the debt(s) in full so that there is no surviving liability at the end of the Chapter 13 case for which the non-filing spouse would continue to be liable.