Marriage can have financial benefits, such as a reduction in taxes and the ability to obtain health insurance from your spouse’s employer, but it can also have some financial disadvantages. And the more time that has passed since you’ve “tied the knot,” the tighter that financial knot may become. If one individual in the relationship makes some financial missteps, both partners could be affected.
If you own most or all of your debts individually, filing bankruptcy is unlikely to have a negative impact on your spouse. However, your spouse’s income may have a significant impact on the type of bankruptcy you are permitted to file. For instance, your eligibility to file Chapter 7 and Chapter 13 may be affected if your spouse’s income is taken into consideration.
In many cases, the debt is incurred due to unforeseen circumstances, such as maxing out credit cards to cover medical bills or getting behind in mortgage or vehicle payments due to the loss of a job. Regardless of what type of debt you are looking to wipe out through bankruptcy, you will have to take something called the means test to determine which chapter of bankruptcy you are eligible to file. And it includes the income of both partners.
The means test calculates whether your income is low enough to qualify for chapter 7 bankruptcy. Before 2005, debtors could choose between filing a chapter 13 and a chapter 7 bankruptcy. But not anymore. Under the amended law, debtors who can afford to repay their debt must file chapter 13.
Your spouse’s income will be factored into these calculations and could put you above the income limits, making you ineligible to file Chapter 7. When it comes to Chapter 13 filings, your spouse’s income will be included when determining the amount of your monthly payments. If your spouse’s income is high enough, it could inflate your payments to an unreasonable amount.
Marital Adjustment Deduction
Fortunately, when filing both Chapter 7 and Chapter 13 bankruptcies, you may qualify for a marital adjustment deduction. This will allow you to deduct expenses paid out of your spouse’s separate income, such as credit card and student loan payments. By claiming this deduction, your spouse’s income is effectively reduced to the portion that is leftover, after qualifying expenses, to use toward household expenses. Common marital adjustment deductions include car payments, credit card and student loan payments, cell phone bills, child support and alimony, business travel, and even legal fees.
Should My Spouse File with Me?
If your spouse also owes or co-signed for your debt, a creditor can still pursue your spouse after you have filed bankruptcy. To prevent this from occurring, you can file a joint bankruptcy, effectively wiping out the debt for both of you. Alternatively, your spouse can continue making monthly payments on the debt, even though you’ve filed bankruptcy. If the jointly owed debt is small, making payments may be feasible, and doing so will prevent the creditor from coming after your spouse. If the jointly owed debts are large, however, you may want to consider filing jointly.
What About Divorce?
We’ve learned what can happen when one spouse files for bankruptcy, but what if the couple is in the middle of divorce proceedings? According to Robert L. Schwartz, an Arizona-based attorney with Dickinson Wright, the process not only becomes more complicated, it can come to a screeching halt.
“Upon the filing of bankruptcy, the pending divorce action will immediately be frozen by the bankruptcy court. It will then be necessary to apply to the bankruptcy court to allow the divorce case to proceed,” said Schwartz.
Whether you’re in the middle of a divorce or you plan to spend the rest of your lives together, if your debts are primarily yours alone and your spouse has little debt, he or she probably should not file bankruptcy. In such situations, your bankruptcy will have little to no impact on your spouse. If you are unsure how to proceed, an experienced bankruptcy attorney can help you understand your rights and options.