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Everything Married Couples Need to Know About Filing for Bankruptcy

Everything Married Couples Need to Know About Filing for Bankruptcy

Being in debt can be very stressful — and not knowing how to get out of it can make your financial woes feel that much more taxing. Making the decision to file for bankruptcy as a married couple is not an easy one. If you and your spouse are worried about your financial future, here are some things to consider.

Common Reasons Married Couples File for Bankruptcy

Challenging financial situations are not uncommon for married couples. Filing for bankruptcy is a debt-relief option can give you and your spouse peace of mind. Here are the most common reasons married couples turn to bankruptcy:

  • Loss of a job
  • Reduction in income
  • Medical bills
  • Unforeseen expenses such as home repairs and maintenance
  • Overspending, lack of budgeting
  • Cost of living increases

How Does Filing for Bankruptcy Affect the Non-Filing Spouse?

The Impact on Non-Filing Spouse’s Credit
Filing an individual bankruptcy petition does not necessarily mean that your spouse’s credit is in jeopardy. However, if you have joint debt and file for an individual bankruptcy and do not pay the joint debt off, the non-filing spouse will see a negative change to their credit score. Because the non-filng spouses liability is not discharged the joint debt would still need to be paid to maintain the non-filing spouses credit standing. If your spouse has co-signed a loan or if you applied for a credit card jointly, the creditor still may seek your spouse to repay the debt — even if the filer’s liability on the debt was discharged the non-filing spouse does not receive relief. If your spouse does not pay back debts being pursued by a creditor, then the default may be reported to credit bureaus.

How Can the “Codebtor Stay” Protect My Spouse?
Once an individual has filed a bankruptcy petition, an automatic stay prohibits a creditor from further contact to collect the debt. In cases where only one spouse files for bankruptcy, the “codebtor stay” can safeguard your spouse. The codebtor stay gives the codebtor automatic stay protection and will prevent the creditor from pursuing the debtor during the bankruptcy process. The codebtor stay only applies to those who file for Chapter 13 bankruptcy and is not an option in Chapter 7 filings.

What Happens to Property?
One of the top concerns for married couples considering bankruptcy is their property. The good news is that filing an individual bankruptcy petition will not affect any property that your spouse solely owns. However, if you live in a common law state, your joint assets and property are treated differently. Whether you reside in Kansas or Missouri, it is best to have a skilled bankruptcy attorney assist with your case to determine the best plan to address your property concerns.

Do I need to Include My Spouse’s Income?
If you are filing for Chapter 7 bankruptcy, the short answer is “yes.” When filing for Chapter 7, you will be required to take the “means test.” The purpose of the means test is to evaluate your current financial state and if you have enough disposable income to pay back your debts. If it is determined that you have enough disposable income to satisfy your debt obligations, then you may be eligible to file for Chapter 13. The means test uses the following as a measurement guideline of your financial situation:

  • Median Income - If your current income is less than the median income in your state, then you and your spouse may be eligible to file for Chapter 7 bankruptcy.
  • Household Income - If your household income exceeds the state median, the means test will determine disposable income and if it is enough to pay off all or part of your unsecured debts.

An experienced bankruptcy attorney will be able to assess whether or not it’s beneficial to file without your spouse. Filing jointly may offer married couples a double exemption benefit — but some restrictions may apply.

What Debts are Not Dischargeable in Bankruptcy?

The following debts cannot be included in a bankruptcy petition whether you file with or without your spouse:

  • Child Support - In the eyes of the law, child support is a “priority debt,” and must be continued during bankruptcy.
  • Alimony - Also known as “maintenance,” alimony is not dischargeable. However, depending on your financial situation, you may request a change.
  • Fines/Penalties from Breaking the Law - Traffic tickets, toll tickets, criminal penalties or any other government-related fines or penalties.
  • Most Tax Debts - While some tax debts can be eliminated, not all are eligible. For example, payroll taxes and tax fraud penalties must be repaid.
  • Student Loans – Public or Private
  • Secured Debts - While the liability of a secured debt may be discharged, a creditor still may be able to take back any property that is securing the debt.

What is the Best Bankruptcy Option for Married Couples?

There is no “cookie cutter” approach to bankruptcy, and the type of bankruptcy that married couples should file highly depends on their financial position — as well as their financial goals. The following is a snapshot of the differences between Chapter 7 and Chapter 13:

Chapter 7 - Liquidation/Straight Bankruptcy
Chapter 7 is designed to eliminate general unsecured debt. The following debts are dischargeable in Chapter 7:

  • Credit card balances
  • Payday loans
  • Medical bills
  • Back utility bills
  • Personal loans
  • Broken cell phone contracts
  • Prior car repossessions
  • Debts owed to previous landlords
  • Broken cable or internet contracts
  • Overdrawn bank accounts
  • Stop garnishments

Chapter 13 - Wage Earner’s Plan/ Debt Reorganization
Chapter 13 is designed for individuals who have assets that are needed to maintain their household. If you are concerned about your spouse being pursued by creditors, Chapter 13 is an option to consider. Chapter 13 can relieve the following debt situations:

  • Foreclosures
  • Vehicle repossession
  • Some taxes debts
  • Unsecured debt
  • Stop garnishments
  • Student Loans - Student loans are generally not dischargeable in bankruptcy, however, you may request to have them placed on hold while you address your other debts. Once you have completed your bankruptcy, you may be in a better financial to resolve your student loan debt.

What Happens if We Divorce or Separate in the Midst of Bankruptcy?
Filing for a divorce in the midst of a bankruptcy case will most certainly complicate the process, and it may be best to complete your bankruptcy before you decide to part ways as a married couple. If you and your spouse are not living together, you can still file Chapter 7 bankruptcy jointly. It is more crucial than ever to have an experienced bankruptcy attorney on your side to help you make the right decisions if you are planning to file for divorce mid bankruptcy.

If you and your spouse have been faced with overwhelming debt, bankruptcy can be a great debt relief option. Our team of skilled attorneys will discuss your concerns and give you advice on the best bankruptcy option for your financial situation. Contact Moore & Associates, LLC at (913) 225-8330 to learn more about how we can help and our no cash upfront options.

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