Bankruptcy may appear like your only option to find relief from a seemingly bottomless pit of debt. You might feel it’s the best option for your entire household. But if your spouse won’t be filing with you, you might be wondering: how does bankruptcy affect my spouse and his or her financial outlook?
It’s a question many couples have faced when considering how to get out from under one partner’s financial obligations while keeping the other partner’s credit and assets intact. Marriage is a partnership where you share the good times and the bad, but sometimes it’s best for both partners when one spouse is shielded from the damaging effects of bankruptcy.
How Does Bankruptcy Affect My Spouse?
You are allowed to file for bankruptcy alone, even if you are currently married. The good news is that if you complete the bankruptcy process by yourself, it won’t mean your spouse is also bankrupt. His or her credit may not take a hit at all. A successful bankruptcy also doesn’t necessarily cause spouses to lose all of their possessions.
The impact that a bankruptcy filing can have on your spouse depends on several factors:
Do California Couples Share All Debts?
Your spouse’s vulnerability will depend on just what type of debts and possessions you have and how much of it you carry together.
- Solo Debt: When one partner carries most of the debt and the other partner is relatively debt-free, the person in debt can usually file for bankruptcy without adversely affecting the other person’s finances in a meaningful way.
- Shared Debt: However, when you share a lot of debt and your spouse is a co-signer on loans and shares credit cards, separating those debts in a bankruptcy filing usually isn’t possible. Your partner can absorb more damage from your filing.
Your bankruptcy could impact your spouse’s credit if you have joint debt that’s discharged in bankruptcy. The notification of that discharge could trigger a note on your partner’s report. Those absolved loans and credit balances you enjoy could show up on the non-filers credit and affect his or her credit score.
Can Creditors Repossess My Spouses Property?
Your state of residence will come into play when you consider what possessions your spouse may lose when you file for bankruptcy. California is a community property state (as opposed to a common-law state). In California, married people jointly own most of the possessions they acquire while together. This can apply to assets even when only one spouse’s name is on the title.
Property that your spouse owned before exchanging vows will largely stay in his or her hands. The property you bought or secured a loan for together is often fair game when assets are sold off as part of your bankruptcy proceedings.
As a couple, you’ll have to decide what property is most important to you both and figure out how to protect it. A bankruptcy attorney can help you determine what is at risk for repossession and if you’ll have enough exemptions to keep cherished property safe through bankruptcy.
Differences in Chapter 7 and Chapter 13 For Spouses
If you follow through with a Chapter 7 bankruptcy, a non-filing spouse can end up vulnerable once you receive your discharge of debt.
Your debt may be wiped away, but keep in mind the non-filing spouse doesn’t get the benefits of that discharge when many joint obligations are in play. Creditors can’t harass you after you’ve been granted bankruptcy, but they can come after the non-filer for the entire amount of what was owed.
Chapter 13 does offer more protection to your spouse when you file for bankruptcy. It carries a safety clause that prohibits creditors from targeting the co-debtor after you file for Chapter 13 Bankruptcy. As long as the creditor is included in the repayment plan that Chapter 13 requires, your spouse won’t have to deal with bill collectors so long as you complete the payment schedule.
What Impact Does My Spouse’s Income Have on My Bankruptcy?
There are ways your spouse’s income can hurt you when you file for bankruptcy, but there are ways to separate his or her income from yours.
For your bankruptcy filing to move forward, you have to pass a Chapter 7 Means test. This test checks to make sure you don’t earn too much to qualify for bankruptcy relief. No matter if you are filing alone or jointly with your partner, your spouse’s earnings will be factored into the means test.
To help your chances of passing the means test, you are allowed to deduct any money your spouse brings in that isn’t used for household expenses. This exemption can include money used to pay child support for a child from another union or money that goes to pay your spouse’s debt that you don’t share in.
Can My Spouse Lose a Job If I File for Bankruptcy?
An employer cannot fire spouses simply because they have a partner going through bankruptcy. They also aren’t allowed to fire you for filing bankruptcy. This would be discrimination and grounds for a lawsuit.
Your bosses also can’t demote you or treat you unfairly simply because they’ve gotten wind of your financial situation.
Reasons To File for Bankruptcy as a Couple
Bravely facing a financial obstacle alone can protect your spouse from the harm a bankruptcy can cause. But in some situations, it’s beneficial for partners to file a joint bankruptcy:
- If you’re both likely heading for bankruptcy anyway, you might as well share the costs. Filing as a family can save on filing fees and attorney costs. There’s only one filing for both partners so it’s virtually half the cost. Those savings can extend to the two debtor education courses required to complete bankruptcy. Couples can take these courses together and avoid having to pay for two extra classes. A joint filing can also mean less paperwork for you and your attorney. Filing separately can mean gathering twice the documents.
- You can both enjoy the discharge of debt in a Chapter 7 Bankruptcy. As mentioned above, when only one partner files and receives a discharge from much of the debt involved, the other partner can suddenly get blindsided by creditors for those same debts. This can include credit card balances that one person was freed from while his or her spouse is still on the hook for those payments.
- If your spouse has filed and you may take a credit hit anyway, you might as well enjoy the freedom from debt a Chapter 7 filing can grant. Once a partner earns a discharge of debt that your name is included on, it can show up on your credit report. Since you’re getting hit with the downside of bankruptcy you might as well take advantage of the upside.
Reasons to File for Bankruptcy Alone
You’ll want to file for bankruptcy alone when it protects your spouse from financial harm, but you’ll also need to make sure it makes sense for your unique situation. It’s worth repeating that when almost all of the debt is in your name and your partner is relatively free and clear, filing alone can be the best option.
A bankruptcy lawyer can guide you towards the best decision for your family, but here are a few guidelines for when it makes sense to file alone:
- Dealing with non-dischargeable debt: Your spouse may have just as much debt as you have, but some debts aren’t cleared in a bankruptcy discharge. When your partner owes a lot of alimony and child support, unpaid taxes, or student loans it may not make sense for him or her to file. You’re better off filing yourself if you have more debt qualifying for discharge.
- Recently married: Newlyweds generally haven’t had time to build a lot of joint debt. (Unless it was a giant wedding and honeymoon that did them in.) When one spouse is carrying the majority of financial woes into the union, it may be a good time to file for bankruptcy. Strike while the other spouse is largely safeguarded and can help pull a partner out of a financial hole on the other side of bankruptcy.
- Business debt: If your debt is tied to a failed business, your spouse’s name won’t usually appear on the loans and purchases involved. A single filing may not pose a large threat to your spouse’s financial security.
- Leaving a spouse free to make a big purchase: Marriage is about facing life’s problem with a partner at your side. In this case, a large purchase like a house or car may be out of the question for you as you contemplate bankruptcy. However, when your spouse is left out of bankruptcy, he or she is often free to secure a loan or money to start a business. This may provide a financial life raft while your finances are on lockdown.
- Your spouse may not be eligible for bankruptcy because he or she has already filed. If your partner has completed a bankruptcy at any point within the last eight years, you’ll have to file alone.
- There are no exemption bonuses for couples: In some states, couples get double exemptions in bankruptcy to apply to anything they want to retain. California doesn’t offer any bonus to couples. You’re granted the same exemptions for filing solo or as a pair.
Bankruptcy and Divorce
The lead-up to a divorce is a very emotional time, but when couples are willing to work together a preemptive bankruptcy can benefit both parties.
Couples getting ready to divorce generally want a clean break, so they usually don’t choose to pursue a Chapter 13 bankruptcy together. Chapter 13 involves a three to five-year plan to pay off joint debts, and that’s a long time to remain in close contact with a divorced spouse and have to trust him or her to make payments.
Chapter 7 Bankruptcy as a Couple Before a Divorce
Chapter 7 bankruptcy takes only a few months to complete and can provide a good launching point for a divorce settlement. You’ll have to divide up assets and possessions, but when a couple owes a lot of money, dividing up assets may prove a fruitless task when bankruptcy might take it all away.
It can be much easier to complete a Chapter 7 Bankruptcy as a couple and find out what will really be left to divide. The discharge will also dissolve many of your joint obligations so that you can start a new life. It’s also nice to share the costs of court fees and attorney expenses.
Keep in mind that some non-dischargeable debt involved will likely remain that you and your partner will have to work on paying off together.
Chapter 7 Bankruptcy Alone After a Divorce
There are still reasons to file for bankruptcy by yourself after a divorce is officially granted. Together a couple may bring in too much income to qualify for bankruptcy. They can’t pass the means test.
In this case, you can wait until the divorce is final and then file alone. Your single income may be low enough to now qualify for Chapter 7 relief.
This is also the right choice if you and your ex are trying to protect certain assets. The partner not facing money issues can take control of a property or possession in a divorce settlement to protect it from a bankruptcy trustee. It’s important to have an experienced bankruptcy attorney helping you with these matters so that you don’t inadvertently end up committing bankruptcy fraud.
Contact a Bankruptcy Lawyer Serving Los Angeles and Southern California
Marriage is about supporting each other through the hard times, but it’s also your duty to protect your spouse from harm. That can be a tricky feat when you’re on a collision course with bankruptcy. The bankruptcy may help get a family out of financial hot water, but it could also end up causing credit and money issues for partners when they didn’t previously have any issues.
The bankruptcy process is difficult to navigate, especially when one or more family members may suffer harm. It’s an option you want to consider from every angle and the Law Offices of Steers and Associates have an extensive background in California bankruptcy law to help you and your spouse find the best option. We desire to see clients and their families emerge from bankruptcy as soon as possible so they can get on with their lives.
When your family faces bankruptcy in Los Angeles or anywhere across Southern California please contact us as soon as possible. We offer a free and confidential consultation to anyone considering bankruptcy. Let us look over your situation as well as your spouse’s situation so we can determine your best path to financial freedom.
You can find our online guide to bankruptcy here: The Ultimate Guide to California Bankruptcy
Elena Steers is a highly experienced bankruptcy attorney, the founder of Law Offices of Steers & Associates, and previously worked as a Bankruptcy Trustee Assistant at the Office of the Chapter 13 Trustee in Los Angeles. Her current affiliations include the State Bar of California, National Association of Consumer Bankruptcy Attorneys, and Central District Consumer Bankruptcy Attorneys Association.