Seelinger Law

Would filing for bankruptcy hurt your spouse?

Would filing for bankruptcy hurt your spouse?

Monday Jan 24th, 2022

In most cases, filing for bankruptcy would not hurt your spouse.

Only your creditors will be informed of the bankruptcy, although that would include creditors whose debts are owed jointly by you and your spouse.  Only your assets would be looked at by the trustee, but again, that would include property you own jointly with your spouse.

The existence of joint debts or joint assets must be taken into consideration when you decide to file.

As to jointly owed debts, your bankruptcy will discharge your liability for the debt, but your spouse would continue to owe the debt.  That isn’t a problem if the joint debt is not what caused you to file for bankruptcy.  If you are using bankruptcy to discharge your credit cards or personal loans, but you have a joint mortgage or car loan that you intend to continue paying, and you do continue paying the mortgage or car loan, that will not hurt your spouse.  If your spouse jointly owes a debt which you are seeking to discharge and will not continue to pay, your spouse will still be responsible for paying those debts, and as a result, your household budget will continue to be strained by those joint debts after you have been released from them.  In that case, your spouse may want to consider filing the bankruptcy with you jointly.  Any debts which are solely your debts would be discharged in a bankruptcy case you file alone, with no effect on your spouse.

Jointly owned property

If the amount of equity you have in assets such as real estate, cars, or investments (other than retirement accounts) is more than you are permitted to keep as exempt assets, the Chapter 7 trustee can sell the asset, giving you the exempt amount from the sale proceeds, and using the non-exempt portion to pay creditors.

If you own your house, your car, or bank accounts jointly with your spouse, but choose to file for Chapter 7 bankruptcy without your spouse, the trustee will focus on the value of your one-half interest in the property.  If your half interest is not worth more than bankruptcy laws allow you to protect, the trustee will not try to sell that property.  If the value of your half interest is more than the bankruptcy laws allow you to protect, the trustee might be able to sell the property. 

When a jointly owned asset is sold by a chapter 7 trustee, and only one of the owners is the debtor in bankruptcy, the trustee must turn over half of the proceeds to the non-filing joint owner, whether the joint owner is the debtor’s spouse or not.  But there are limitations on the trustee’s ability to do so.  Essentially, if selling the property would benefit your creditors more than it would harm your spouse, the trustee will be permitted to sell the property, with your spouse receiving half of the sale proceeds.  A lot of factors are taken into consideration in determining whether the benefit to your creditors outweighs the harm to your wife.

If there is a risk that your jointly owned property would be sold by a chapter 7 trustee, especially if it is your home, as opposed to some other type of property that your spouse would not mind being paid for her half interest after a sale, you should consider filing a Chapter 13 bankruptcy instead of Chapter 7.  The Chapter 13 trustee cannot sell your property.  Instead of selling assets to pay creditors, the Chapter 13 trustee oversees a payment plan, with the amount you must pay under the plan being partially based on how much a Chapter 7 trustee could have paid your creditors after selling assets.  Your spouse would not be at risk of having the jointly owned assets sold by the trustee in Chapter 13 bankruptcy.

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