By Attorney Ginger Kelly, January 24, 2018
Bankruptcy is a great way to get a fresh start, but how will it affect your spouse if you want to file individually? Attorney Kelly investigates a few common questions about dealing with a bankruptcy when a spouse might be involved.
Am I required to file bankruptcy with my spouse?
The short answer to this question is no. If only one partner in a marriage owes debt, then only that partner should file for bankruptcy. Debts where spouses are joint and severally liable for payment will remain with the spouse who has not filed for bankruptcy. The exception is in states that follow community property law. In community property states, single spouse bankruptcy for joint debts may in some situations be advantageous.
What happens to my credit or property if my spouse files bankruptcy?
As a general rule, one spouse filing for bankruptcy will not affect the other spouse’s credit rating or financial situation. Because a debt is a contract between a debtor and a creditor, each debtor must sign the contract to be liable for payment. The spouse not signing the contract would not be liable for the debt. This is why the bankruptcy of one spouse doesn’t affect the other spouse or cause the other spouse to become bankrupt too.
What happens to joint debts when one spouse files for bankruptcy as an individual?
Under a Chapter 7 bankruptcy, when one spouse’s debts are discharged, or wiped clean, the creditor can go after the other spouse jointly responsible for the debt. But, in a Chapter 13 bankruptcy, joint debtor spouses have a major advantage. When the debtor spouse plans to re-pay his or her debts, over the time of the 3 or 5 year plan, the creditor will generally not bother the other spouse, as long as bankruptcy plan payments are deposited on time.
What are the exceptions?
There are some notable exceptions to co-debtor spouses when only one is filing for bankruptcy. For example, there is a possibility that the bankruptcy of one’s spouse may show up on the other’s credit report, but only if joint debt is involved. If joint debt is involved, your bankruptcy may affect your spouse’s credit scores. But not paying the debt will also affect your spouse’s credit scores. Another issue might involve applying for a joint loan in the future. The bankruptcy of one spouse will affect the creditworthiness of both spouses applying for a loan jointly, or together.
Another exception deals with jointly held property. In a regular bankruptcy, the US Trustee may take non-exempt property and sell it to use it to pay creditors. Even jointly held property can be taken if not exempted. This is of vital importance in community property states, states where both spouses in a marriage own and are responsible for all the debt and property acquired during the marriage. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Massachusetts and Rhode Island are not community property states but rather, common law property states.
In common law property states, like Massachusetts and Rhode Island, your individual assets and your interest in any property you own jointly with your spouse (typically half unless otherwise noted) are considered part of your bankruptcy estate. In other words, they split the baby, so to speak. But your spouse’s half or portion is protected, generally. The property your spouse owns in his or her name alone is normally not at risk.
However, it is important to know that in Chapter 7 bankruptcy, the appointed US Trustee may be able to sell the entire jointly owned asset if you can’t exempt the value of your interest, provided that the property can’t be divided. If the trustee sells the property, he or she will pay your spouse the value of her interest and use your portion of the nonexempt proceeds to pay back your creditors. This is what I mean by “split the baby.” Keep this in mind.
What if my spouse gets calls and letters from my collection agencies?
Sometimes collection agencies will pursue both spouses even though only one spouse owes debt. If you feel that the calls and letters asking for payment are only meant for your spouse you can do something at this point. First, ask the collector to prove the debt by requesting proof of responsibility for those debts. If the debt is solely to your spouse’s name, you can ask the collectors to stop calling you or sending you letters, but you must do this in writing (via letter). If your spouse has already filed for bankruptcy, the collection agency can be stopped if his/her attorney would motion the court and ask to court to enforce the automatic stay.
Can I file for bankruptcy without my spouse knowing?
Yikes! Yes you can, but no don’t do it. Theoretically and in a legal sense, yes, you can file without your spouse knowing. However, because a Chapter 7 uses household income as part of the Means Test, you will need to report your spouse’s income. Also, in some extreme cases, some bankruptcy courts use income garnishment for debt repayment. Since you don’t want your spouse discovering their paychecks have been garnished, after the fact, it’s a really good idea to let them know from the beginning. Hiding bankruptcy is just a temporary solution, at best, and isn’t a good idea. Besides, secrets like this may wreak havoc on a marriage.
When do I need an attorney to file?
If you are considering bankruptcy, it always best to consult with a lawyer. A bankruptcy attorney will advise you to many things critical to your bankruptcy success. For example, fraudulent transfers come to mind.
Just the other day, while waiting for my client’s meeting of the creditors, I couldn’t help but to notice a pro-se debtor speak to the US Trustee at a subsequent meeting. It’s an open floor. Everyone can hear what’s going on. This poor young man did not realize that he made a fraudulent transfer by giving a sum of cash money to his father within a certain period of time before he filed. Not only can the US Trustee unwind transfers, quite often a discharge in matters like this are not permissible. I felt sorry for that debtor. He worked so hard to get to this point on his own, only to be met with a very unsettling outcome. This is why most debtors need a good bankruptcy attorney.
A bankruptcy attorney will advise you as to whether bankruptcy is your best course of action, based on your situation. Also, your attorney can advise you as to whether or not your spouse will be affected if you file or whether or not they should file with you.
Filing for bankruptcy is a great way to get a fresh start, but it may affect your spouse if they aren’t filing with you. Find out more about joint debt, keeping your spouse’s property and more by contacting a skilled bankruptcy attorney in your local area.
The Law Office of Ginger B. Kelly is a boutique type law firm located in central Massachusetts. We are not Big Law. We only handle a small number of clients at one time. Each client gets personal attention and care. Each client gets hours and hours of time devoted to their particular case. Our office is in an easy to find location in Charlton. This means you don’t have to drive to the big city of Worcester or Boston and pay for parking. We not only offer free parking, but free coffee in a calm and peaceful place. Your discussion with our senior attorney is very confidential. Your first consultations will last about an hour in a stress-free, homey type atmosphere.
As one client put it, “This is like an old fashioned law office, very comfortable.”
Book your appointment now to explore your best options for this New Year. We’ll have a nice pot of coffee waiting for you when you visit.
Also, keep in mind that it’s tax return season. Many people use their tax refunds to help pay for their bankruptcy. There is no better time than now (tax refund season) to talk for free and find out more about ways you might be able to get the bankruptcy that you need now.
ABOUT ME: Attorney Kelly is an attorney in good standing, licensed to practice in both the Federal District and State Courts of Massachusetts and Rhode Island. Her law practice is focused on consumer debt, finance, bankruptcy and District Court matters. Attorney Kelly is experienced in both criminal and civil trial work. On a personal note, Attorney Kelly enjoys writing and other things, like conservation and agriculture. To find out more, visit, http://www.attorneykelly.com or call us at (508) 784-1444.
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