Not only can you file for bankruptcy when you’re married, but you'll get to choose how to do so. You can decide whether one spouse should file an individual case or both spouses should file jointly together. Depending on your situation, one approach will likely be more beneficial. In this article, you’ll learn some pros and cons of filing bankruptcy when married.
Married Filing Jointly—It’s Efficient
Here are a few reasons to file with your spouse:
- You’ll pay less in legal fees. You’ll usually pay a lower price for one bankruptcy case rather than two.
- You’ll pay one filing fee. Paying one instead of two filing fees will save you hundreds of dollars.
- The case will proceed more efficiently. It will be simpler for the bankruptcy trustee to administer one case instead of two separate cases.
Married Filing Separately—It’s Strategic
Here’s why it might make sense for one spouse to file alone:
- Your spouse doesn’t have dischargeable debt. A spouse who isn’t liable for your debt and doesn’t have much personally won’t benefit from bankruptcy. In most cases, preserving that spouse’s credit rating for a large purchase later will make more sense.
- You’d benefit from filing under different chapters. Spouses filing a joint case must file under the same chapter. If you file separate cases, one could file for Chapter 7 and the other for Chapter 13 bankruptcy. This might be a good option if one spouse has credit card debt that would get wiped out in a Chapter 7 case while the other has nondischargeable child support arrearages they’d like to pay throughout a three- to five-year Chapter 13 repayment plan.
- You might need to file again later. Suppose one spouse files a Chapter 7 case to eliminate qualifying debt the other spouse isn’t liable to pay. By not filing together, the other spouse can file a Chapter 13 case later and save the family home from foreclosure (you can catch up on the missed payments over three to five years). Also, cases don’t always go as planned, and sometimes you can’t file immediately if the court dismisses your case. It might be a smart move to preserve your spouse’s filing ability.
Married Filing Separately: You Must Include the Non-Filing Spouse’s Income
It's common for a couple to make too much money to qualify for a Chapter 7 bankruptcy debt discharge (the type that erases debt in a matter of months). It's also common for people to assume that if only one spouse files, only that spouse's income will be counted for qualification purposes. However, it's incorrect. You can’t solve a qualification problem that way.
Even when only one spouse files, bankruptcy law requires both spouses’ income for the Chapter 7 means test income qualification, and the monthly budget (Schedule I: Your Income). Additionally, you'll need the non-filing spouse’s recent tax returns, income information (such as paycheck stubs or profit and loss statements).
You’ll be able to deduct some of your spouse’s expenses, like a student loan or support payment, which could lessen the impact of the spouse’s income. Also, spouses living in separate households can deduct both sets of household expenses.
Streamlining Divorce by Filing Bankruptcy
Instead of dividing up debt in a divorce proceeding, discharging it in bankruptcy before your divorce is final can be more efficient. After your bankruptcy, you’ll have far fewer issues to resolve in the divorce proceeding.
For instance, if you qualify for a Chapter 7 discharge, you can erase debt like:
- credit card balances
- medical and utility bills
- personal loans, and
- mortgages and car loans (but you’ll need to return the property).
By contrast, filing for bankruptcy after a divorce can be tricky without proper planning. Because the bankruptcy won’t wipe out your ex-spouse’s debt, if the marital settlement agreement or divorce decree requires you to pay off a debt in your ex’s name, you’ll likely remain responsible for paying it after the divorce.
One way around this problem is to ensure you’re responsible for paying debt in your name alone. Careful planning will increase the odds of emerging from a post-divorce bankruptcy free of all obligations.
Speak With a Bankruptcy Lawyer
Filing for bankruptcy before or after a divorce is often complicated, as is a separate bankruptcy when a non-filing spouse has significant assets—and these issues are made more so by the particular laws in your state. Whenever contemplating bankruptcy, speak with a knowledgable bankruptcy lawyer. If divorce is involved, you'll want to find an attorney familiar with both family law and bankruptcy issues.