Married Couples under Chapter 7 and Chapter 13
Feb. 15, 2016
Couples can file bankruptcy separately or together. That option comes with consequences, including whether to file under Chapter 7 or 13.
If you’re considering whether to file bankruptcy with or without your spouse, consider the following:
Each spouse has the legal right to participate in the other spouse’s bankruptcy or not to participate.
There are consequences to filing separately or together. Consequences can affect:
the preservation of your assets;
protection from creditors’ collection activity;
the discharge of your debts; and
dealing with the IRS and any other income tax authorities.
Today’s blog post covers item 1, and the next ones cover the parts of item 2.
Each Spouse Has the Right to Join the Other’s Bankruptcy or to Not Join.
Married spouses often ask whether one of them is allowed to file a bankruptcy alone, without the other, especially when the debts are mostly one spouse’s.
They sometimes also wonder whether they should nevertheless file together to protect the spouse without most of the debts.
Under bankruptcy law each person can file his or her own case alone, can file jointly with his or her spouse, or can decide not to file at all. All these choices are available to each spouse.
All these options don’t make the choice easier. In many situations it is in both spouses’ individual best interest to file a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts” together, but sometimes there are good reasons for one of them not to be part of that filing.
A Delicate Decision
It can be a delicate choice, legally and personally.
One spouse may owe most of the debt, because of a failed business or a prior divorce. One spouse may have run up some debt irresponsibly, maybe without telling the other. The other spouse may have assets that he or she would rather not expose to the bankruptcy process. One spouse may be unhappy about the other person already hurting his or her credit record, and so, sensibly or not, prefers not adding a bankruptcy to his or her credit record.
The marriage itself may well be at risk because of financial stress. We’ve all heard that financial problems are one of the top reasons for divorce. The survival of the marriage may hinge on making wise choices about whether to file bankruptcy, who should file, and whether to file a Chapter 7 or Chapter 13 case.
The Marriage Outlasting Chapter 13
There can be many good financial reasons to choose between Chapter 7 and 13, but to that sometimes it’s sensible to add one more factor: the strength of the marriage.
That’s because of the huge difference in the length of the two procedures. A Chapter 7 case is usually done in 3 to 4 months. A Chapter 13 one usually lasts 3 to 5 years. So a sensible question is whether your marriage will outlast a Chapter 13 case.
Chapter 13 payment plans can be adjusted mid-stream, and even converted into a Chapter 7 case at virtually any point. But it’s seldom wise for a married couple to enter into one when there is a serious risk that the marriage would end before the case would be completed.
The realities are that 1) many Chapter 13s do not get finished successfully because a lot can happen during the life of a case, even without an unsteady marriage; 2) unsuccessful Chapter 13 cases often have financial downsides, not the least being wasted time and money.
So, if the situation would normally call for a Chapter 13 case, but the marriage is not likely stable enough to survive to its completion, it may be more sensible to go with the Chapter 7 option after all.