A common question in the office is, Does filing for bankruptcy affect your spouse? In this article we will answer this question and others related to the subject.
Our New York bankruptcy lawyers have 50 years of experience helping individuals and businesses solve their financial problems. Feel free to contact us today for a personalized consultation.
Does filing for bankruptcy in 2021 really affect your spouse?
It is a question that every married man or woman will ask himself when facing serious financial problems. The answer is yes and no at the same time.
You can file for bankruptcy individually, but it could have consequences for your partner. Here you should consider the following points that we will analyze in the article:
- Property laws of the state in which you live.
- If you have joint property or debt.
- If you file for bankruptcy under Chapter 7 or 13.
Note: You might be interested in learning the differences between Bankruptcy Chapter 7 and 13.
While married, should my spouse and I both file for bankruptcy?
No. However, you must provide information in your bankruptcy documents about your marital status and expenses separately and jointly.
This applies even if you are separated. You will likely be asked about your income and debts and those of your spouse. Learn how to find out all your debts.
Information about your spouse and yourself on official forms
Form B101 (Voluntary Petition for Individuals Filing Bankruptcy): In the instructions for the form, you will see that it says “A married couple can file for bankruptcy jointly – called a joint case, these forms use the word “you” to request information from both debtors ”.
In terms of judges and lawyers, “may” is different from “shall”.
- May: Allowed to do but not required.
- Shall: You must do something, that is, you are obliged to do it.
For this reason, the form indicates that a married couple “may” declare bankruptcy jointly, that is, it is allowed but not required.
Here are some official bankruptcy forms that require information about the debtor’s spouse and / or the debtor himself.
Bankruptcy forms that require spouse information
- Schedule I: Debtors report their income here. The instructions read “If you are married and your spouse lives with you, include information about your spouse, even if your spouse is not filing bankruptcy with you. If you are separated and your spouse is not filing bankruptcy with you please do not include information about your spouse”.
- Form 107: Both the debtor’s income and that of the debtor’s spouse filing bankruptcy jointly must be listed. This will be done for the current and previous calendar year.
Bankruptcy forms if you are married but separated
- Schedule J: Is where the debtor’s expenses are listed. The instructions here are clear: “If you are married and are filing individually, include your non-filing spouse’s expenses unless you are separated.”
- Schedule J-2 (Schedule J-2): If your spouse and you are separated can still file joint bankruptcy. This form lists the expenses that the debtor’s spouse has in a separate household.
Chapter 7 Statement of Your Current Monthly Income: In this the debtors must declare if they are single, married or separated. If the debtors are separated and not filing bankruptcy with their spouses, they must promise under oath that they do not live apart to avoid the means test requirements.
Does filing for bankruptcy under Chapter 13 affect your spouse?
Chapter bankruptcy 13 may affect your spouse if you choose to file for bankruptcy individually.
Note: This article assumes you are aware of Chapter 13 bankruptcy. If not, please review our article “Filing for bankruptcy Chapter 13”.
Common scenario where bankruptcy affects your spouse
Debt is not always caused by poor choices or planning but for something beyond your control.
Let’s take an example of a workplace accident:
- If a spouse is unable to work, expenses will accumulate and you can add up to considerable debt for medical expenses.
- The debt will be primarily in the name of a spouse and here a default could occur and the owner of the debt initiates a lawsuit.
- If the plaintiff wins the lawsuit, they can garnish wages, place liens on real property, or collect bank accounts.
Note: In cases where both spouses have bank accounts or joint assets these may be vulnerable to actions by creditors.
Therefore, this is a clear example of a case where filing for bankruptcy does affect your spouse:
- Here creditors can place a lien on shared real property such as the house;
- They can also raise a joint bank account.
Note: It is important to emphasize that the creditor will only have the right to the assets of the debtor spouse.
Sued for Debt? Learn what are your best options when you have been sued by a debt collector.
What happens to the co-debtor under Chapter 13?
In Chapter 13 co-debtor stay can help you if you have joint obligations with your spouse. This does not affect your partner as it prohibits creditors from going after co-debtors. That is, after your spouse.
Note: Keep in mind that creditors can ask the court to lift the co-debtor’s stay if you don’t follow the established payment plan.
Is my spouse affected if I file for bankruptcy and they don’t?
If someone files for bankruptcy and their partner does not either under Chapter 13 or otherwise the following may occur:
- The filers debts will be canceled at the end of the bankruptcy but their partner’s debts will continue to exist. That is, payment of the debts will be required and creditors may take legal action.
- The assets of both and the community property are protected when the filer files for bankruptcy. Creditors cannot touch assets owned by their partner.
- There is no such thing as a common debt or common debt discharge. Spouses who wish to pay their collective debts together must do so by filing Chapter 13 jointly. Bankruptcy will not show up on a partner’s credit report, only on the filer’s.
Note: Creditors can take action against the spouse if they have not filed for bankruptcy. They can also initiate actions against their part of the property in common.
With lines of credit in the name of both spouses
Does filing for bankruptcy affect your spouse in this case? Yes, it will have an effect.
If the unsecured debt is in both names, this becomes more dangerous for the non-filing spouse. In this situation, filing under Chapter 13 will be more complex.
The creditor may have the right to pursue the non-declarant spouse for payment after the balance of the payment debt has been canceled in the following case:
- The declaring spouse does not fully repay the unsecured debt held jointly in the bankruptcy of Chapter 13.
- The same can happen with any unsecured property that is surrendered during bankruptcy.
The mortgage servicer can pursue the non-filing spouse after the bankruptcy case is closed in the following cases:
- The couple had a joint mortgage on a property with a bad credit after it was auctioned. In addition, that balance was discharged at the end of the repayment plan of Chapter 13.
Note: If the debtor pays all his debt in the period of 3 or 5 years there will be no problem for the spouse who does not file for bankruptcy.
Note: Married debtors should discuss bankruptcy options well with both their spouse and our experienced bankruptcy attorneys at Ortiz & Ortiz. In some cases, filing joint bankruptcy may be beneficial for your spouse and your household assets.
Spouses file jointly under Chapter 13
A key point to keep in mind is that filing a joint Chapter 13 is much cheaper than filing individually:
- Chapter 13 bankruptcies are more expensive to file than Chapter 7 bankruptcies so this is something to keep in mind.
- This can be a great way to protect your assets if both spouses have a lot of joint debts or multiple debts individually.
- You could double your exemptions if you jointly file for bankruptcy. These exemptions are used to protect your property from a sale by the trustee assigned to your case.
Note: You might be interested in reading our blog post “Can you go to jail for debt?”.
Does filing for bankruptcy Chapter 7 affect your spouse?
The common property is considered part of the bankruptcy estate. Therefore, the debtor spouse filing for Chapter 7 bankruptcy exposes all non-exempt assets of the marriage to liquidation.
Therefore, depending on what shared assets you share, the consequences of bankruptcy for your spouse could be severe. It is highly recommended that you speak to an attorney to see what option might be best for you.
Can filing for bankruptcy affect your spouse’s credit?
- As a general rule, filing for bankruptcy individually will not affect your spouse’s credit.
- If you have joint debts it can appear on your partner’s credit report.
- Creditors will receive a notice of your bankruptcy and will be able to contact your spouse for joint debt collection.
- If both spouses file for bankruptcy jointly, they will see a significant impact for up to 10 years.
What about joint assets?
As a general rule, your bankruptcy filing will not affect any property that your spouse owns in their name.
If the spouses have jointly-owned assets, the fate of these will depend on whether they live in a state of Community Property or Common Law.
Note: Do you have an Estate Plan? Are your assets secure? Is your family protected? Talk with our asset protection lawyers in New York today.
Community Property States vs. Common Law
Community Property States
- In these states almost all assets and income acquired by either spouse during the marriage are considered community property.
- They can be used to pay off your debts since both spouses own assets jointly and equally and everything is considered bankruptcy assets.
- Bankruptcy will have a major impact on your spouse if you both own a lot of joint assets in common property.
States under Common Law
- Your individual assets and interests in any property you own jointly with your spouse are considered part of the bankruptcy estate.
- Property owned by your spouse in their name is generally not at risk.
Note: Under Chapter 7, the bankruptcy trustee can sell any jointly owned assets if he cannot exempt the value from their interest and the property is not divisible. If the administrator sells the property, they will pay the spouse the value of their interests. Additionally, you will use your share of non-exempt income to pay creditors.
FAQs on How Bankruptcy Affects Your Spouse
To complete the topic, we have added some of the frequently asked questions we get in the office.
If I file for bankruptcy, can creditors go after my spouse?
- Yes, creditors can go after your spouse to collect joint debts although there is an exception;
- By filing for bankruptcy, you only eliminate your personal liability for the debts that are discharged in your case;
- Individual bankruptcy will affect your spouse as it does not cancel your spouse’s debts or any joint debts that exist.
Exception: If you live in a common property state and pay off your joint debts, creditors can only go after your spouse’s separate property after bankruptcy. That is, they cannot go after your marital community property.
Almost all assets that your spouse acquires during the marriage are considered community assets, this includes your income. Therefore you receive the benefit of joint debt discharge. This is commonly known as a phantom discharge.
Does bankruptcy affect my spouse if they use an additional credit card?
These supplemental credit cards are common among spouses. They have the same account number as the main credit card. If your spouse has used it on your behalf, they may be held liable for accumulated debts on the account.
A simple check here is to contact the bank to see if they authorize the spouse a consultation or deny it. If authorized, it is likely that the spouse will be responsible for the total balance owed on the card and therefore will be responsible too in the event of bankruptcy.
What happens if you share debt with your spouse?
In case you have a shared account with your spouse:
- Only your obligation to pay the debts will be erased.
- Creditors will still be able to pursue your spouse for debt.
- Bankruptcy can show up on your spouse’s credit report. This should not affect your spouse’s credit score as long as you are up to date with your payments.
What if we want to apply for credit accounts or joint loans in the future?
You and your spouse will be able to do this, but filing for bankruptcy will affect your ability to obtain a loan with terms in your favor for some time.
As you rebuild your credit score, your ability to obtain favorable terms on future loans will increase.
On our website we show you how to improve your credit score fast.
The Risk of Consolidating Debt After Marriage
Although it is not uncommon for spouses to consolidate their debt after marriage, the risks may outweigh the benefits:
- A common strategy is to obtain a joint consolidation loan to deal with debt in a more affordable way.
- Once they become co-borrowers of a loan, they will be obliged to pay it, therefore both will be legally obliged to pay it.
- It is not possible to remove a name from a loan without the permission of the lender. Since the lender approved the joint application, they may not be willing to grant this permission.
- If due to a marital breakdown one of the spouses stops making payments, the lender will look to you for the full payment.
For these reasons, it is often wise to keep personal debt obligations separate and treat them individually.
Talk to Ortiz & Ortiz Today
We have already answered the question: Does filing for bankruptcy affect your spouse?
However, you may have many more questions that need answers for your specific situation.
At Ortiz & Ortiz we have over 50 years of history helping clients filing for bankruptcy in New York with hundreds of successful cases behind us. As one of the most recognized law firms in NY, we can help you and your spouse find the best financial solution for your case.
Our bankruptcy experts will be able to address your particular legal needs, explain the law, and represent you in court.
Do not hesitate to contact us today to request your personalized and completely confidential consultation. It can be the first big step in regaining your financial stability.