Making Sense of Bankruptcy: Filing without Your Spouse to Protect His or Her Assets
July 1, 2015
You may not need to file bankruptcy without your spouse to prevent her or her asset(s) to be liquidated.
Here’s the sentence that we’re explaining today:
If you want to prevent your spouse’s separate assets from being potentially taken by a bankruptcy trustee, don’t take the risks of filing a bankruptcy case without your spouse without first finding out if 1) those assets are already protected by available property exemptions, 2) can be protected through a joint Chapter 13 filing or 3) through smart pre-bankruptcy planning.
In the right circumstances it’s sensible for a married person to file a bankruptcy case alone, without his or her spouse, for the purpose of preventing the spouse’s assets from being caught up in the bankruptcy case. Let’s explore what the right and wrong circumstances would be.
The Risk of Assets Being Taken by a Bankruptcy Trustee
In most consumer Chapter 7 “straight bankruptcy” cases the debtors filing them don’t lose anything to the bankruptcy trustee. Chapter 7 IS the “liquation” form of bankruptcy, in which creditors potentially receive a share of the debtors’ available assets in partial payment of their debts. But in most cases everything that the debtors own are protected through property “exemptions”—specified amounts of certain types of assets that are out of the reach of the trustee.
But if something a particular Chapter 7 debtor owns is not covered by the available exemptions, the trustee can take and sell it, and distribute the proceeds among the debtor’s creditors. That’s because at the filing of a bankruptcy case “all legal and equitable interests of the debtor in property as of the commencement of the case” are within the jurisdiction of the bankruptcy court.
The Right and Risks of Filing by Yourself or Together with Your Spouse
So if you definitely need to file a bankruptcy case and your spouse does not (usually because he or she has no troublesome debts), and if your spouse has assets that would be potentially at risk in a bankruptcy case, it’s perfectly appropriate to consider not having your spouse join in your bankruptcy filing. The law allows you to file a solo bankruptcy by yourself or for you and your spouse to file a joint one together—it’s totally up to you and your spouse, and what’s best for each of you.
The primary risk of filing without your spouse is that debts that he or she owes will not be discharged (legally written off). Be aware that the discharge of YOUR liability on debts does NOT discharge any liability that he or she has on them. You don’t want to file your own separate bankruptcy and then later learn that he or she needs to file his or her own case because of unexpected liability on debts. So depending on the circumstances it may be safer to file a joint case together, especially if the asset of concern can be protected.
Protection through Property Exemptions
As mentioned above, most consumers filing Chapter 7 “liquation” bankruptcy in fact have nothing they own liquidated in the case, because everything they own is covered by property exemptions. Before you start seriously considering having your spouse not join in filing bankruptcy, get the following question answered: does your spouse actually have a legitimate concern that something that he or she owns would not be covered by an exemption in a joint bankruptcy case?
This is a so much more to this than just going down a list of exemptions to see if the asset at issue is covered.
First, in almost half of the states you have a choice between using the state’s exemptions or the federal ones, potentially giving you a better chance at protecting the asset at issue.
Second, some state and federal exemptions double the usual single-person exemption amounts when two spouses file a joint case, some do not increase the amount at all, while some increase it somewhat.
Third, valuing the asset at issue is not necessarily straightforward, making it harder to determine if the entire asset is covered by the allowed exemption or if it is instead at risk.
Fourth, you don’t qualify for the exemptions available in a state until you’ve lived there long enough, with special rules about when you can benefit from that state’s homestead exemption in particular.
Fifth, additional considerations come into play if your spouse’s ownership interest is a partial one, owning the asset(s) together with either you (e.g., jointly vs. “in common”) or with other family members (such as from an inheritance, a common source of a spouse’s separate property).
Sixth, the property laws of “community property” states (9 states mostly in the West and Southwest, but also including Wisconsin and Louisiana) add a whole additional layer of complications to this if you live or have lived in any of the applicable states.
Asset Protection through a Joint Chapter 13 Case
If you and your spouse do learn that he or she does indeed own an asset not covered by the available exemptions, it may be safer and wiser overall to protect that asset through a Chapter 13 “adjustment of debts” case with your spouse instead of by you filing a separate Chapter 7 case. Generally Chapter 13 provides a quite safe method for protecting non-exempt assets by paying money to creditors in return for keeping that asset. But in many circumstances you actually do not pay any more to your creditors for the benefit of keeping the asset. And in any event Chapter 13 may be the better option regardless of the asset-protection aspect, since it comes with many legal tools not available under Chapter 7.
Asset Protection through Pre-Bankruptcy Planning
There are often ways to shield an asset through steps taken before your bankruptcy case is filed. This comes with its own risks and should only be done with thorough advice from an experienced bankruptcy attorney. In the bankruptcy procedure you will be asked under oath about the details of any asset transfers during a certain length of time before your bankruptcy filing, so it’s crucial that any pre-bankruptcy planning action be taken with great care.
The bottom line is your spouse may or may not have a valid concern about his or her assets if he or she were to join you in filing bankruptcy. It takes conscientious lawyering to determine whether that concern is valid in your situation, and if so how to chart the best way forward.