- 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. Deciding between filing a joint petition or an individual bankruptcy depends on numerous conditions--most commonly the amount of community debt, the nature of the debts, sources of income, the type of property owned, the state in which they live, and how ownership is defined. - Joint Debts and Debts During Marriage
Deciding between a joint or individual filing makes it necessary to identify how the debts were accumulated. The non-filing spouse may also be held liable for certain debts incurred during the marriage, although marriage itself is not a qualification for shared liability of debt. In general, the 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 the majority of debt intended to be discharged is owned solely by the filing individual, a joint bankruptcy filing can be avoided. - Income Considerations
In Chapter 7 bankruptcy filings, a means test is conducted to gauge the necessity of the bankruptcy. In these cases, your combined household income may be considered regardless of your intent to file individually. This could affect whether certain debts can be discharged (Chapter 7) or must be repaid over time (Chapter 13). - One Bankruptcy Filing Will not Protect the Other
If one spouse files without the other, joint debts and other liabilities must be paid off to avoid any creditor lawsuits or action in the future. Simply filing for bankruptcy by one spouse gives no guarantees or protections typically offered by bankruptcy to the other non-filing spouse. Creditors have also been known to aggressively pursue the non-filing spouse when they become aware of the individual filing. In the case of a Chapter 13 filing specific protections can be invoked by the co-debtor stay. - Property Concerns During Bankruptcy
There are two types of marital property ownership determined by the state laws where you live. "Equitable distribution" is the first--it means that the bankrupt spouse's estate includes his or her separate property as well as half of the jointly owned marital property. In "community property" states, all property acquired during the marriage is considered to be equally owned by each spouse. While the non-filing spouse's separate property acquired before the marriage is still safe, all of the community property is put at risk in bankruptcy. - Credit Consequences of Bankruptcy
Attempting to protect the non-filing spouse's credit is a common intention of those who individually file for bankruptcy. Although each person has his / her own individual credit report, creditors of shared debt can sometimes report bankruptcy even on the non-filing individual's report. The greatest consequence will be the adverse affect of submitting a joint credit application with the bankruptcy showing on the bankrupt spouse's report. While you could omit the bankrupt spouse in an application, some loans like home mortgages may require both spouses' income to qualify.
Dealing with bankruptcy when a spouse is involved is significantly more complicated than an individual personal bankruptcy. Due to the nature of the filings and complications of different state laws, contacting a bankruptcy attorney beforehand can help you make this decision. Attorneys will be more familiar with local regulations and can help better assess how bankruptcy will affect each of those involved
Sources:
- Bankruptcy Law Network- Should My Spouse File Bankruptcy with Me?
- BKLawyer - Bankruptcy Without My Spouse?
About the Author:
Heindrick So works for a Bay Area Real Estate company that specializes in residential wholesale lending. His work experience is comprised mostly of sales and marketing background which included a high end media sales position at Magnolia Hi-fi. Heindrick is also in his final year of pursuing his Bachelor's Degree in Electrical Engineering at San Jose State University.
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