Does a married couple have to file bankruptcy together, or can just one spouse file bankruptcy? Whether due to wanting to protect a loved one from stress and anxiety, embarrassment from bankruptcy when married, or financial strategizing, there a host of reasons why a spouse may wish to file bankruptcy independently of their husband or wife.
We discuss the possibilities and best courses of action for claiming bankruptcy when married and answer if you can file bankruptcy separately from your spouse, in the following article. Reach out to our Houston bankruptcy lawyers today for more guidance on your specific case.
Can I File Bankruptcy Without My Spouse?
Can you file bankruptcy without your spouse? The answer is yes, filing bankruptcy without a spouse is legally permissible, although you may have to include information about your spouse on your forms, also known as schedules, when you make your petition to the bankruptcy court.
Here are some valid considerations and answers to frequently asked questions. If you file for bankruptcy without your spouse, it will typically not affect your spouse’s credit, unless the debts you are attempting to discharge are “joint debts,” meaning that you and your spouse applied for them together, such as a credit card or bank loan with both of your names on it. In this case, your bankruptcy filing may appear on your spouse’s credit report, and your creditors may have a second option – coming after your spouse – even if bankruptcy results in a discharge of your debt.
Beyond just debt, another issue for married couples to consider when evaluating bankruptcy is property owned by the spouses. If one spouse owns property in their name only and is not the spouse filing bankruptcy, it generally won’t become part of the bankruptcy estate. This is especially important in Chapter 7 “liquidation” bankruptcies, because the non-filing spouse’s completely-separate property will not become part of the bankruptcy estate, will not be subject to sale to pay creditors, and can exceed any applicable Texas or federal exemption amounts that would typically be applied in order to protect the property.
Can I File Bankruptcy with My Spouse?
We’ve explained how a person can be married but filing bankruptcy single, however, the converse question is also an important one.
Married couples are eligible to file “jointly” for bankruptcy, meaning a joint petition is filed with the bankruptcy court with the names of both parties. This keeps the costs of bankruptcy down by allowing married debtors to file a single case with a single fee, and to attend all hearings and handle all other administrative functions together as a team.
There are thus two ways of how to file bankruptcy while married – filing individual bankruptcy while married and filing jointly while married.
Community Property vs. Common Law Property
Can a married person file bankruptcy without a spouse? As we’ve explained, this is possible, and if you go this route, your bankruptcy will not affect any separate property that your spouse owns individually. But if you have jointly-owned assets, the treatment the assets will receive in bankruptcy depends on whether you live in a common law or community property state.
If you live in a common law property state, your individual assets and your interest in any property you own jointly with your spouse (typically half) are considered part of your bankruptcy estate, and the property your spouse owns in his or her name alone is normally not at risk.
However, in community property states like Texas, almost all assets acquired (and income earned) by either spouse during the marriage are considered community property. In other words, property acquired by either spouse during the marriage is considered equally the property of both spouses, a 50/50 split. Because both spouses own community property jointly and equally, all of it is considered property of your bankruptcy estate and all of it may be used to satisfy your debts.
This means the answer to the question ‘can one spouse file bankruptcy without affecting the other’ depends on the how many of assets are community property, and if the answer is many, your bankruptcy can have a significant impact on your spouse.
Texas Is a Community Property State
The State of Texas is a community property state, affecting the status of bankruptcy filings in the bankruptcy courts located in Texas’ Northern, Eastern, Southern, Western judicial districts.
Therefore, in Texas, all community property is considered part of bankruptcy whether you file with or without your spouse, placing more property at risk.
Note that the separate property of your spouse, such as a house inherited by your spouse before you were married, is not part of your bankruptcy. However, you may still be required to disclose it in your bankruptcy papers because the trustee may want to confirm that the property is in fact separately owned.
How Does Bankruptcy Affect Your Spouse?
Assuming you file for bankruptcy without your spouse, after review by the trustee, and after either liquidation of non-exempt assets (Chapter 7) or partial repayment over three to five years (Chapter 13), your debts are discharged. This means that bankruptcy eliminates your personal liability for debts as an individual.
However, your individual bankruptcy doesn’t wipe out your spouse’s obligation to pay back his or her own debts or any joint debts you have together, which creditors may pursue against your spouse for the full amount. This is a strong reason to consider a joint bankruptcy filing if the circumstances warrant doing so.
One exception worth noting in Texas, a community property state, is that regarding debts you owe jointly with your spouse, creditors can only go after your spouse’s separate property (and not your marital community property) after your bankruptcy. Since almost all property your spouse acquires during the marriage, including income, is community property, your spouse essentially will receive the benefit of your discharge as well for your joint debts. This is commonly referred to as a “phantom discharge.”
Chapter 7 bankruptcy, sometimes known as “liquidation bankruptcy,” involves the placing of all nonexempt property into the bankruptcy estate, and ultimately, a discharge of most debts. As part of this process, the court-appointed bankruptcy trustee sells your nonexempt assets and uses the proceeds of the sale to pay your creditors.
This means that bankruptcy eliminates your personal liability for debts as an individual. However, your individual bankruptcy doesn’t wipe out your spouse’s obligation to pay back his or her own debts or any joint debts you have together unless you file a joint bankruptcy petition.
If your debts with your spouse are largely joint debts, filing for Chapter 13 bankruptcy will protect your spouse as well as you from those creditors with something called the “codebtor stay.” This special Chapter 13 umbrella protection prohibits creditors from coming after any of your codebtors under the theory that you are making partial payment on your debts under a structured repayment plan. As long as you continue to make the payments, generally over three to five years in the plan developed with the bankruptcy trustee, your creditors will not be able to apply to the court to lift the stay.
Can I File Bankruptcy Without My Spouse Knowing?
Yes, although for the reasons discussed herein and the significant emotional impact that bankruptcy can have on your life, as well as the practical implications of its effects on joint property, it is not generally recommended to keep a bankruptcy filing a secret from your spouse.
Additionally, even though it is legally possible to file a bankruptcy case without your spouse, you will need to include certain information about your spouse on the bankruptcy forms, which ask for household income, marital assets, life insurance policies and beneficiary information, and information about whether debts are independent or joint.
Navigate Your Bankruptcy with Help from Experienced Professionals
When preparing to make decisions about bankruptcy that will affect you and your spouse, you will need a lawyer with specific experience on bankruptcy in Texas and who has the right knowledge, resources, and compassion to help you.
Contact the Law Offices of Kretzer and Volberding P.C. today to discuss your bankruptcy concerns.