Under bankruptcy law they CAN file a joint bankruptcy. But often it’s not such a good idea. Sometimes it’s a very bad idea.
CAN File a Joint Bankruptcy Case Together
A “joint case” is one filed “by an individual… and such individual’s spouse.” “Spouse” is not defined in the Bankruptcy Code, but presumably refers to someone who is legally married to the “individual.”
So, if you and your spouse are contemplating divorce, you CAN file a Chapter 7 “straight bankruptcy” jointly.
But SHOULD You File Together?
As you think about whether you should file jointly, consider some timing considerations. Think about whether it makes sense to file the divorce case first, before filing the bankruptcy case. Or the other way around.
If it makes sense to file divorce first, when that’s done you’ll presumably no longer be married. Since you would no longer be spouses, you would not be able to file bankruptcy jointly.
So what are the considerations about which to file first?
Debts as of the Date of Filing Bankruptcy
One very important consideration is that a bankruptcy case affects only debts that exist when you file that case. (Section 727(b) of the Bankruptcy Code.) Future debts aren’t included.
This means that filing a bankruptcy case before going through divorce will not affect the obligations created in that divorce.
Many debts arising out of divorce aren’t affected by bankruptcy, but some can be. So sometimes it makes sense to hold off on filing bankruptcy until after the divorce. At that point you could only file without your now-former spouse.
Assets as of the Date of Filing Bankruptcy
Same thing regarding things you own—your assets. Usually the only assets involved in your bankruptcy case are those you own “as of the commencement of the case.” (Section 541(a)(1) and (2).) So assets that you acquire after you file your Chapter 7 case are not part of the case.
Divorce usually involves a division of assets between the spouses. You may lose some assets to your spouse through divorce, you may gain some. This anticipated shifting of assets may affect when you file a Chapter 7 case. If are expecting to gain assets in your divorce that may not be protected (“exempt”) in bankruptcy, that may encourage you to file bankruptcy before the divorce. If divorce is going to take away unprotected assets, it may make sense to file divorce first.
So When SHOULD Spouses Considering Divorce File a Joint Bankruptcy?
Arguably, an about-to-divorce couple should never file a joint bankruptcy. Why not?
First, the two spouses can file individual bankruptcies at any time. They are not obligated to file jointly. It often makes a lot of sense to file separately, and since you’re allow to maybe you should.
Second, if you are seriously thinking about divorce, the odds are high that you and your spouse’s legal interests are diverging. There is a good chance that the legal solution best for you is not the best for your spouse. You can’t be on the same team if your goals are different.
Third, your interests are often in direct conflict. You certainly can’t be on the same team if your goal is to defeat your teammate.
Fourth, being on the same side in a Chapter 7 case assumes a level of honesty, trust, and cooperation that seldom exists between ready-to-divorce couple.
Should You EVER File Chapter 7 Case Together?
You might still file a joint Chapter 7 case if doing so is in each of your self-interest’s. That means it’s in the best interest of each of you to file:
a Chapter 7 case
that Chapter 7 case jointly
at the same point in time
before starting the divorce case
Let’s look at these in our next blog post.