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How are Joint Bankruptcy Petitions Handled?

Many times married couples will have to decide if they should declare bankruptcy together, file separately or, whether only one spouse needs to file. There can be financial and practical advantages and disadvantages to all scenarios. There may also be legal pros and cons to each scenario.

The Bankruptcy Court does allow a husband and wife to file a joint bankruptcy petition. This essentially means, the spouses will file just one set of papers and will disclose all of their income, expenses and debts on the one set of bankruptcy schedules.

With the recent Supreme Court ruling on gay marriages, the ability of gay couples to file jointly is now probable. Consult with your local bankruptcy lawyer if this situation arises.

The First Step

The first step is to completely review all of the income and all the debt obligations of each spouse. It is crucial to know who is bringing money into the household and what expenses the money is being used for. The lawyer will also review which spouse or spouses are obligated on the each and every debt.

Debts Issues for Joint Filers

When a husband and wife both file, then each spouse lists their individual debts and also their joint debts. Individual debts are debts where only one spouse is liable. Most medical bills are held by just one debtor. Many debtors have their own credit cards and are individually liable on their own respective credit cards. Many joint assets like a home have a joint mortgage where both husband and wife agree to pay for the loan.

Some car loans are made by the husband and wife together but often just the principal driver of the car will sign the car loan.

Business debts may also require both husband and wife to sign the business loan. Your bankruptcy lawyer will make sure you address all these details before the debtors file.

Assets Issues for Joint Filers

When a husband and wife file, the husband must disclose which assets are only his and the wife will disclose which assets are only hers. Both husband and wife will list the assets that are held in both names. The house is often owned by both spouses. The correct identification of owners for assets is often crucial when it comes to examining which exemptions can be used.

Joint Bankruptcy and Exemptions

Exemptions are a way for the debtor to protect certain assets. There are state exemptions and federal exemptions. Some states dictate that the debtor can only use the federal exemptions. Other locations allow the debtor to choose between using the federal exemptions or the state exemptions. (In Connecticut, people in debt can choose either the federal or state exemptions.)

The exemptions allow debtors to keep assets whose value is less than the exemption. For example, if a debtor has a used car worth $1,000, then the debtor can use the federal bankruptcy exemption to save the car even if the debtor owes money on the car – as long as the loan isn’t secured. Exemptions can get very complicated. There are wildcard exemptions that can also be used. There are issues of whether the asset is secured by a loan and issues of the true value of the asset to be considered.

Exemptions in joint bankruptcy cases just adds to the complications. When debtors use the federal exemptions, then the joint filers (the spouses) can double the amount of their exemption in an attempt to save their assets. If state exemptions are used, then the issue of doubling exemptions is normally left up to the state.

Doubling exemptions is a big factor in deciding whether to file jointly because the doubling can really help spouses keep their many of their assets. A key, though, is that both the husband and wife have to have a financial claim to the asset.

Other Benefits to Joint Bankruptcy Filing other than Exemptions

The costs are lower. There are court costs for filling a bankruptcy. Filing one joint petition is cheaper than filing two separate petitions. There is also the matter of legal fees. Many lawyers will charge less for a joint petition than for filing two separate petitions.

Dischargeability of Debts: If both spouses are liable on a debt, then it hurts just one of them if just one debtor files. The other debtor will still be liable on the debt even when the sole filer is discharged. Filing jointly on joint debts discharges the debt for both spouses.

The means test: It may be easier to pass the means test when both spouses file especially if only one spouse is working. It’s a good idea to check the means test for two filers filing jointly as opposed to just one filer.

Simplicity: Joint bankruptcy filers can attend just one creditor’s meeting and need to file only one set of documents.

The Downside of Filing a Joint Bankruptcy

If one spouse has most of the debt obligation and the other spouse has the valuable assets, then it may make sense for just the one with the debt obligation to file. For example, if the home is in the husband’s name and the wife has large unpaid medical bills; then it may make sense for just the wife to file.

The joint income will be considered if both spouses file jointly. If just one spouse with lower income owns the debt, then that spouse should file alone. That way it’s easier to pass the means test. It can also be easier to meet a Chapter 13 plan. This can be especially true if the debtor has a priority debt such as a student loan or a domestic support order.