This is one of the most common questions clients ask us. If most of the debt in question was incurred by the spouse filing bankruptcy and not joint debt, the filing will have minimal effect on the non-filing spouse.
Here are a few important factors to consider:
An individual or a couple will qualify for Chapter 7 bankruptcy only if their household income, less expenses allowed by the Court, is not considered abuse. Even if only one spouse files, the Court will look at the income of both spouse. The income of the non-filing spouse will be disclosed when the other spouse files his or her petition. The non-filing spouse’s job or wages will not be affected by the other spouse’s bankruptcy filing.
2. Should I Choose Chapter 7 or Chapter 13 For Joint Debt With A Non-Filing Spouse?
A chief reason that creditors make both spouses liable on a debt is so they can collect from one spouse if the other spouse files bankruptcy. In a co-debtor situation, if a spouse files for Chapter 7 bankruptcy alone, only that spouse’s debts will be discharged.
The non-filing spouse will remain fully responsible for the joint debt; creditors will pursue the non-filing spouse for payments. In a Chapter 13 bankruptcy, however, an automatic stay goes into effect preventing collection from the non-filing spouse. This is called the Section 1301 codebtor stay.
Section 1301 provides specific bases required to lift the codebtor stay. An experienced bankruptcy attorney is necessary to weigh your options.
3. Credit Report
The bankruptcy filing will only appear on the filing spouse’s credit report. If a bankruptcy filing appears on the non-filing spouse’s report, he or she should call the credit reporting agencies immediately to rectify the error. The non-filing spouse’s credit report will not be affected by the filing spouse’s bankruptcy filing. The non-filing spouse will continue to have access to credit on behalf of the household.
Moreover, he or she could help the filing spouse re-establish his or her credit by co-signing for new debts. In contrast to a situation where both spouses incurred the debt together, if most of the debt was incurred by one spouse, it may make more sense for the heavily indebted spouse to file bankruptcy in order to protect the other spouse’s credit score.
There are other benefits to keeping the spouse with less or minimal debt out of your bankruptcy filing. The non-filing spouse will continue to have access to credit on behalf of the household. Moreover, he or she could help the filing spouse re-establish his or her credit by co-signing for new debts.
4. Examine Your Assets. Who Owns What?
When considering who should file bankruptcy, it is important to consider not only what kind of debt you are trying to get rid of but also who owns which assets. This is crucial because once an individual files for Chapter 7 bankruptcy, all assets that he or she owns become part of the bankruptcy estate and will be sold by the trustee in order to pay the creditors.
For example, if the wife owns the less-than-a year car and the husband owns the house in his name only, and most of the debt that is holding back the couple is debt that the wife accumulated, it will make sense for only the wife to file bankruptcy. In this scenario, if she files for Chapter 7 bankruptcy, the house will be protected from becoming part of the bankruptcy estate.
Determining if both husband and wife should file for bankruptcy, whether to file for chapter 7 or chapter 13 bankruptcy, and ensuring the protection of as much of your property as possible is a complex process. Each couple’s situation is different, so it is important to consult an experienced bankruptcy attorney to help you make the best decisions.
Call An Attorney
As a former trustee for the U.S. Bankruptcy Court, with over thirty years experience, Attorney Martin Long is an expert in the industry with decades of experience in Bankruptcy Law in Loveland Colorado. We also serve Aurora, Centennial, Highlands Ranch, Denver, Littleton, Castle Rock, Colorado and the Denver metro area with three convenient locations. For help with your financial matter, call the Law Office of Long & Long for a free initial consultation at 303-832-2655 or go to www.denverbankruptcylawyer.net and make a consultation request. schedule a free initial consultation.