Married couples overwhelmed with debt could find bankruptcy to be a viable solution to gain control of their finances. However, married couples may struggle with the decision on filing for bankruptcy if they are unsure if it’s the right choice. If you and your spouse have questions about bankruptcy, these could be the answers you're looking for.
Do I Need to Include My Spouse’s Income?
Whether you file for Chapter 7 bankruptcy (“straight” or “liquidation” bankruptcy) with or without your spouse, you will be required to take the “means” test. The means test is designed to determine whether or not you have enough disposable income to pay off all your debts. Whether you are filing for bankruptcy jointly or as an individual, your spouse’s income will need to be included.
How Will My Spouse’s Income Impact the Means Test?
Passing the means test heavily depends on your income — and the lower the income, the better your chances of passing. Since you will be required to include your spouse’s income when filing for Chapter 7 bankruptcy, this will increase the income amount. However, any amount of your spouse’s income that does not go towards household expenses, such as child support, can be subtracted from the total household income. This is listed as a “marital adjustment.”
How Does the Means Test Work?
The means test compares your total household income against the median income in your state. If your current household income is less than the median household income in your state, then you may be eligible to file for Chapter 7 bankruptcy.
If your household income is more than your state’s median income, and it is determined that you have enough disposable income to pay back your unsecured debt, then Chapter 7 will not be an option. In this case, you may be eligible to file for Chapter 13 bankruptcy.
How Does Filing for Bankruptcy Impact My Spouse’s Credit?
Filing for bankruptcy without your spouse won’t necessarily harm their credit — unless your spouse has co-signed on any credit cards or loans. If you’ve filed an individual bankruptcy petition, creditors still may seek out your spouse to satisfy the debt. If your spouse is unable to pay back the debt, it could be reported on his/her credit.
If your spouse’s credit is a concern, then filing for Chapter 13 bankruptcy could protect your spouse. Chapter 13 has a special provision where third parties, such as co-signers can be safeguarded from creditors.
What Happens to Property?
California is a community property state, which means that couples share ownership of any property (such as a car or house) and debt obtained during the marriage. The non-filing spouse’s property could be affected even if you decide to file a bankruptcy petition on your own. Addressing property in a bankruptcy petition can be tricky, so it’s best to consult with a bankruptcy attorney to discuss your options.
Can Bankruptcy Help Save Our Home?
Facing foreclosure can be an extremely stressful situation, and not knowing what to do can make it that much more taxing. Filing for Chapter 13, also known as “reorganization” or a “wage earner’s plan,” could be the best option to save your home if you are facing foreclosure. Here’s how it works:
- After filing the bankruptcy petition, the court will issue an “automatic stay” which prohibits creditors from further debt collection as well as putting the foreclosure to a halt.
- Second mortgages are treated as an unsecured debt and can be eliminated in bankruptcy.
- Your debt is reorganized into a three to five-year payment plan.
Should My Spouse and I file Bankruptcy Jointly?
If you and your spouse are feeling overwhelmed with trying to pay down your debt, joint bankruptcy can be a good solution in wiping out marital debt without having to file a bankruptcy petition separately. Filing jointly can save money on filing fees and other associated court costs.
Can My Spouse's Wages Be Garnished For My Debt?
Since California is a common law state, you and your spouse equally own all property that was acquired through your marriage — which means that the debt is also held equally. If you default on a loan, your spouse’s wages could be garnished. If you and your spouse fear wage garnishment, it’s crucial to contact a bankruptcy attorney to discuss how to avoid garnishment.
What Is the Best Bankruptcy Option for Married Couples?
The type of debt you need to eliminate and your financial goals will be the deciding factors in determining what type of bankruptcy is best for you and your spouse. Here are some of the benefits to both Chapter 7 and Chapter 13 bankruptcy.
- Stop harassing debt collector calls and letters
- In most cases, you can keep your house and car
- Most household possessions can be protected
- Wipe out unsecured debt
- Bankruptcy can be completed within a few months
- Stop harassing debt collector calls and letters
- Save your home from foreclosure
- Protect certain assets from creditors
- Third parties (co-signers) are protected from creditors
What Happens If We Divorce or Separate After Filing For Bankruptcy?
Married couples who have a hard time paying down their debt on their own may find bankruptcy to be a viable solution in getting back on track financially. However, if a couple decides to separate or divorce mid-bankruptcy, it could complicate the process. While you have the legal right to file for bankruptcy at any time, it’s crucial to understand how the process works. Here are some things to consider:
- While your debts may be discharged through your personal bankruptcy filing, keep in mind that creditors can still seek out the non-filing spouse to satisfy the obligation.
- If you are legally separated, but not living together, you may file for bankruptcy without having to disclose your spouse’s income.
- If you’ve already started the bankruptcy process jointly and decide to separate mid-bankruptcy, you may be able to bifurcate your plan — which means to divide it into two separate cases.
If you are moving forward with a divorce and have already started your bankruptcy petition, it’s best to consult with a bankruptcy attorney to evaluate your situation to determine the best plan of action.
What Debts Cannot Be Included In Bankruptcy?
While credit card debt, medical bills and personal loans are common debts that can be discharged in bankruptcy, these debts are not dischargeable:
- Debt incurred post-bankruptcy
- Spousal or child support
- Fines and penalties such as speeding tickets and criminal restitution
- Student loans
- Retirement plan loans
- Secured loans in which you have stopped making payments
- Certain income tax debts
- Debts not listed in your asset case
- Certain property taxes
If you and your spouse are faced with mounting debt, bankruptcy may be the solution for you. While each married couple’s financial situation isn’t the same, it’s important to explore all the options and benefits that bankruptcy can provide. Having a skilled attorney on your side can ease your financial worry. Contact at (800) 996-9932 today to learn more about how our team of experienced bankruptcy attorneys can get you on the road to financial freedom.