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.
When a debtor files a bankruptcy he or she usually files in his or her own name. Still, the bankruptcy can affect many other family members. Often times, the reverse can also be true. It’s no surprise that a divorce can lead to the need for filing bankruptcy. Generally speaking, it’s easier for couples to pay the bills than it is for single people because there is joint contribution and no need for double assets.
For example, a couple only needs one home, one cable service and one home insurance policy; a couple or married couple can usually get by with only one car and one joint health insurance policy. There’s only a need to pay for one set of utilities.
After divorce, the spouses or couple live apart and have to pay for these items separately. Being single can be twice as expensive as being married which can leave the single people in serious debt.
Considerations when a debtor is married or has children.
In many cases, the debtor will have taken out the loans with their spouse. Most mortgage companies, for example, won’t extend a loan to buy a house or get a mortgage for a house unless both spouses sign.
The party or person giving the loans needs to make sure they can go after the collateral (also called a security interest) if the loan enters into a default stage. Simply because both spouses sign the loan, default can force both spouses into bankruptcy. If one spouse files alone, the other spouse will likely be responsible for the debts and will have to file bankruptcy too.
The advantage of joint filing
One advantage of filing a joint bankruptcy is that the costs for filing jointly are normally ½ the cost of filing separately. Filing jointly can also mean the legal fees are much less per person.
The key to deciding whether a joint filing is necessary is in the details. An accredited bankruptcy office and it’s attorneys will review the income and debts for each person. If a judgment is only against one person, then the joint assets may still be protected from creditors. These are just some examples of the practical and legal considerations your bankruptcy lawyer will review.
The first step in joint petitions
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 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.
Is child and spousal support dischargeable
Child support is usually not dischargeable but circumstances differ. If a father/mother is under a Court Order to pay support for his/her children, then the children’s standard of living shouldn’t be harmed. The Bankruptcy Code does require that the father/mother continue the support payments. The same principal applies to spousal alimony if the state where the couple lives allows for it.
If there are arrears, then it may be possible to use Chapter 13 bankruptcy to pay the arrears over a 3 to 5 year period. The regular (weekly, monthly or other timely) payments must be paid once the Chapter 13 petition is approved.
Chapter 7 considerations
A Chapter 7 bankruptcy usually takes four to six months so for couples contemplating a divorce, it may be advisable to go through with the bankruptcy first – especially if only one spouse is really having financial problems.
Chapter 13 considerations
A Chapter 13 bankruptcy lasts for 3 to 5 years and couples who are going through a divorce and who wish to keep their assets need to know that assets may not be sold for that period of time.
In many divorces, it makes sense to not try to save the assets because the couple will be moving to separate residences. In other divorces, a spouse may want to try to keep the house (especially if there are children). Couples should know that keeping the house will mean keeping up the Chapter 13 payments for a long time.
- Exemptions: Even when couples file a joint petition, each spouse is entitled to his/her own exemptions. For the major assets, like the home and the cars, doubling the exemptions can be the difference between being able to keep the home or car or selling those assets.
- The state laws on divorce: Part and parcel of considering the bankruptcy issues is also considering the state laws on such issues as property division. If needed your bankruptcy lawyer will make sure the debtors work with family law counsel and will review the issues at hand.
- Social Security Benefits: Social Security benefits are protected even when a person files for bankruptcy. Some spouses may be eligible to claim their spouse’s social security, especially if they become a widow. It is crucial to make sure the Social Security benefits are protected. The same thought applies to other retirement benefits that the bankruptcy law lets debtors keep.
- Debt allocations: This area of financial obligations can be especially complicated and will require the assistance of a bankruptcy attorney. A family law order may require one spouse or parent to pay a joint debt. In bankruptcy though, the Bankruptcy Court may still consider that both spouses and both signers of the loan obligation are responsible. Deciding which spouse is truly obligated to pay the debt will have to be decided by agreement or by a decision of the Bankruptcy Judge.
- The Means test: Chapter 7 has a means test which examines the income of the debtor. If the debtor’s income is too high, then the debtor will likely be forced to file a Chapter 13 so that the creditors can be paid. When couples file jointly, the means test can be more complicated. Likewise, if just one spouse files for Chapter 7, the amount of contribution from the other spouse may be a factor. An experienced bankruptcy law will guide you through this tricky area of the law.
If divorce is being complicated, it may (depending on the income level and other factors) be advantageous to wait until the divorce is complete. Filing separately can make the means test easier than filing jointly because the means test doesn’t’ automatically double the income for two spouses. The key to figuring out the best road to take is usually the size of the household.