Does filing for bankruptcy also affect my wife?

If I file for bankruptcy, does that affect my wife too? It’s a question every married man asks himself when he’s in serious financial trouble. The answer is yes, and at the same time no. You can file for bankruptcy individually, however this can have consequences for your partner depending on certain factors, such as:

  • If you have shared property or debts;
  • The property laws of the state where they live;
  • If you file bankruptcy under Chapter 7 or Chapter 13.

What is Chapter 13 bankruptcy?

Chapter 13 bankruptcy allows the debtor to pay some or all of their debts over the course of 3 to 5 years. Y any remaining unsecured (and dischargeable) debt will be discharged from bankruptcy at the end of the repayment term.

If you are married, filing for Chapter 13 bankruptcy may affect your spouse if they choose to file alone. Let’s take a look at some of the problems they may face.

A common scenario

Debt doesn’t just happen because of poor planning or poor choices. Sometimes it happens through no fault of your own and for reasons beyond your control. Take, for example, a car accident. If a spouse is unable to work due to a car accident, not only will their expenses pile up, but they can also be saddled with significant medical bills. However, the debt will be primarily in the name of a spouse. So what could happen?

Let’s say a debt default occurs and the debt holder files a lawsuit. If the owner wins the lawsuit, they can now place liens on real property, garnish wages, or collect bank accounts. In cases where both spouses own assets or have joint bank accounts, those assets may be vulnerable to the actions of creditors. This is a typical case where bankruptcy affects your wife as well.

Creditors can levy a joint bank account or place a lien on shared real estate (including your own home). However, the creditor is only entitled to the debtor spouse’s share of that asset.

Lines of credit in the name of both spouses

Here’s another case where bankruptcy affects your spouse: A Chapter 13 bankruptcy filing can become more complicated and dangerous for the non-filing spouse if the unsecured debt is in both names.

If the filing spouse does not fully repay the jointly held unsecured debt in Chapter 13 bankruptcy, the creditor may have the right to pursue the non-filing spouse for payment after the balance of the debt has been discharged. This could also be the case for any secured property that is surrendered during bankruptcy.

For example, if the couple had a joint mortgage on property that had a deficiency balance after it was auctioned, and that balance was discharged at the end of the Chapter 13 bankruptcy repayment term, the mortgage company can pursue the spouse. that you did not file after the bankruptcy case is closed.

On the other hand, if the bankruptcy debtor pays all of their debt in that 3-5 year period, the non-filing spouse will have no problem; but that’s not likely because that rarely happens.

Before filing for bankruptcy, married debtors should honestly discuss the ramifications of bankruptcy with both their spouse and their attorney.. In some cases, it may actually be beneficial for a married debtor to file for joint bankruptcy to protect their spouse and, by extension, their household assets.

The husband files for bankruptcy and the wife does not.

There is no such thing as ‘community debt’. If the husband files for Chapter 13 bankruptcy or otherwise, his debts will be discharged at the end of the bankruptcy. The wife’s debts will continue to exist and she will be required to pay them, or she will be subject to the actions of the creditors.

However, the community property and assets of both spouses are protected when the spouse files for bankruptcy. That means the husband’s creditors can’t touch the assets the wife owns. Still, creditors can take action against her if she hasn’t filed for bankruptcy, and they can take action against her share of the community property.

Apart from there being no “community debt”, there is no such thing as a “community discharge”. If the spouses want to pay their collective debts together, they will have to file Chapter 13 jointly. On the other hand, the bankruptcy will not show up on the wife’s credit report, only on the husband’s.

Spouses file bankruptcy jointly under Chapter 13

One of the main benefits of filing a joint return is that it is much cheaper compared to filing separately..

Chapter 13 bankruptcies are more expensive to file than Chapter 7 bankruptcies, so the costs associated with filing for bankruptcy will be considerable. In this sense, If both spouses have a lot of joint debts or several individual debts, filing for Chapter 13 can be a great way to protect your assets.

And what about Chapter 7 bankruptcy?

Well, we have bad news. Since community property is considered part of the bankruptcy estate, the debtor spouse filing Chapter 7 exposes all of the marital property to liquidation. For this reason, it is advisable to file under Chapter 13.

Does filing for bankruptcy affect my wife’s credit?

If you file bankruptcy without your spouse, it generally won’t affect your credit. But if you have joint debts, the fact that you filed for bankruptcy may show up on your partner’s credit report. Also, creditors will receive notice of your bankruptcy and can usually contact your spouse to collect any joint debt.

What about joint ownership?

Generally, your bankruptcy will not affect any property your spouse owns in his or her name. But if you have joint property, how it will be treated during bankruptcy will depend on whether you live in a common law or community property state.

States with common property law

In this case, your individual assets and your interest in any property jointly owned by your spouse (generally half, unless otherwise noted) are considered part of your bankruptcy estate. Property owned by your spouse in his or her name is not normally at risk.

But keep in mind that in Chapter 7, the appointed bankruptcy trustee can sell the entire jointly owned asset if they can’t exempt the value of your interest and the property can’t be divided. If the trustee sells the property, they will pay your spouse the value of their interest and use their share of the non-exempt income to pay creditors.

Community property states

In states with community property laws, almost all assets acquired (as well as income) by either spouse during the marriage are considered community property. Because both spouses own property jointly and equally, all of it is considered property of your bankruptcy estate and can be used to pay off your debts.. This means that if most of your joint assets are joint property, bankruptcy can have a significant impact on your spouse.

How does bankruptcy affect a family home?

The most common asset of a married couple is the family home. The Trustee will arrange for the property to be appraised and calculate probable equity. In that calculation, they must take into account mortgages and costs of sale. It is common to assume that the asset is owned 50:50 unless there is something else in writing, such as a trust deed.

It is worth reviewing this calculation quite carefully. A common issue is the fairness of the waiver. If your spouse has raised funds on the property to invest in a business, this should come out of their half share. Also, if you have deposited different amounts, this may also be reflected in the capital split.

Now, it is possible to reach an agreement with the Trustee to buy the share of the bankrupt spouse. The Trustee would generally prefer to do this rather than force a repossession and sale in order to save time and cost. A small discount may also be given to the affected spouse to reach this type of agreement. Generally, the mortgage company, if any, will not take any action as long as the interest continues to be paid.

Now, if the Trustee is ignored, after a year the possession proceedings will begin. The Trustee has three years from the date of bankruptcy to begin this process.

Can creditors go after my spouse if I file for bankruptcy?

When you file for bankruptcy, you eliminate only your personal liability for the debts that are discharged in your case. Your individual bankruptcy affects your wife because it does not nullify her obligation to pay her own debts or any joint debts you have. This means creditors can still go after your spouse to collect joint debts.

But there is an exception. If you live in a community property state and discharge joint debts, those creditors can only go after your spouse’s separate property (not your marital community property) after bankruptcy. Because almost all of the property your spouse acquires during the marriage is community property (including their income), your spouse essentially also receives the benefit of the discharge for their joint debts. This is commonly known as a phantom download.

What if my spouse has a supplemental credit card?

Supplemental credit cards are very common among spouses. A supplemental credit card has the same account number as the main credit card. Therefore, if your spouse has used a supplemental credit card with your name on it, they may be held jointly liable for all debts accrued on that account.

One way to determine this is by contacting the company. If the credit card company responds with “we’re not allowed to talk to you because this isn’t your credit card,” then you can be reasonably sure that your spouse isn’t responsible for the card. But if the company talks to the spouse, they will likely be responsible for the entire balance owed on the card, and they will be in bankruptcy as well.

The co-debtor position (co-debtor) in a Chapter 13 bankruptcy

If you have joint obligations with your spouse, filing for Chapter 13 bankruptcy can protect you from creditors thanks to something called “codebtor suspension”.

The suspension of the co-debtor of Chapter 13 bankruptcy does not affect your wife. The reason is that it prevents creditors from going after your co-debtors (in this case your spouse) during bankruptcy.. But keep in mind that creditors can ask the court to lift the stay if you don’t follow the established payment plan..

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