Making Sense of Bankruptcy: Should You File Bankruptcy without Your Spouse If the Debts are Only in Your Name?
June 29, 2015
You can file bankruptcy without your spouse, but the question is whether that’s the best choice.
Here’s the sentence that we’re explaining today:
One spouse often owes all or most of the debts 1) in new marriages, or 2) where one spouse operated a business or 3) only one spouse had good credit; deciding whether only the spouse with debts should file bankruptcy requires making sure that the other spouse truly isn’t liable on the debts.
To be clear, a married person can file a bankruptcy case without his or her spouse. Whether or not he or she should file by him or herself depends on the circumstances.
All or Most Debts in One Spouse’s Name
The most obvious reason a couple would consider having only one spouse file is if that spouse is the only one legally liable on all the debts, or at least on all the troublesome ones.
The couple may have bought and financed a home or a vehicle together, and so are jointly liable on it. But they may want to keep on making those payments and would be able to do so if they could get rid of other debts owed by only one spouse.
Or sometimes absolutely all the debts are indeed owed by only one spouse.
In either situation there would seem to be no reason for the spouse with no debts or at least no troublesome debts to join in the bankruptcy. Especially if that spouse has a good or decent credit record, not being included in the bankruptcy could avoid damaging it.
And the benefit would go not just to the non-filing spouse. Assuming that the couple stays married, the spouse who files a solo bankruptcy would benefit from the non-filing spouse’s undamaged credit record directly and indirectly.
After his or her bankruptcy is finished, the two of them may qualify for joint credit purchases that they wouldn’t have otherwise, based on the strength of the non-filing spouse’s credit history. That could also be a good way for the spouse who filed bankruptcy to start rebuilding his or her credit, helping this spouse and his or her own credit directly.
Or if they wouldn’t qualify for a credit purchase together, the non-filing spouse may qualify by him- or herself. This would indirectly benefit the spouse who filed bankruptcy by giving access to credit through his or her spouse.
So, in the right circumstances, it CAN help for only one spouse to file bankruptcy—help both that spouse and potentially the other one, too.
In a newer marriage, especially if the spouses are no longer young, one spouse may come with the baggage of too much debt. The other spouse understandably wouldn’t be excited about joining in a bankruptcy if he or she has little debt or no more than a responsible amount. Often the person with the debt wants to avoid dragging his or her new spouse into a bankruptcy case.
At some point the couple comes to realize that one spouse’s serious debts are hurting their joint financial lives. Indeed those debts may be jeopardizing their marriage. That would especially be true if the person with the debts was not fully honest about the amount of debts he or she was bringing into the marriage and/or continued to use credit during the marriage without fully informing the other. So the spouse with the debts wants to file his or her solo bankruptcy.
One Spouse Operating a Business
In a marriage in which one of the spouses has been operating a business, there’s a greater chance that the business-related debts would be that spouse’s name. If that’s the case, and the primary purpose of the bankruptcy case is to deal with the financial fallout of closing down the business, having only the business-operating spouse file that case could make sense for all the reasons cited above.
One Spouse with (Good) Credit
It’s not unusual for one spouse to have significantly better credit record than the other, with the result that all or most of the debt in the marriage, or at least the troublesome debt, is in only that spouse’s name. That spouse would want to do a solo bankruptcy, again for the credit record reasons cited above.
Make Sure Seemingly Non-Liable Spouse Really Isn’t Liable
If for whatever reason only one spouse seems to be liable on all the troublesome debts, so that this spouse is contemplating filing bankruptcy alone, the most important tasks is for you and your attorney to carefully determine whether the potential non-filing spouse truly is not liable. If the non-filing spouse later ends up being legally liable on some debts he or she did not expect to be, that would defeat the purpose of not being included in the bankruptcy filing.
It is often more difficult than you’d think to know for sure whether one spouse is or is not liable on a debt. People often have either never received or have not saved the documentation that would reveal who is liable. The spouse who doesn’t think he or she is liable may in fact be liable by operation of law. If you are (or were) in a community property state, generally both spouses are liable on most debts incurred during the marriage. And in many states the spouse who did not sign the debt papers or did not otherwise participate in the purchase or transaction can still be liable for certain kinds of debts.
The proposed non-filing spouse can only make an informed decision about whether or not to join in the bankruptcy case if he or she clearly knows what, if any, debts he or she would remain liable for if he or she does not join in.