Bankruptcy Filing Options for Married Couples

Married couples can choose whether to file for bankruptcy jointly (together) or individually. You'll determine which will be best for you after taking into account:

• the value and type of property you own together and separately
• the exemption laws of your state that determine which assets you can keep
• the bills you owe together and separately
• the credit score of each spouse
• your combined income (which must be included in both individual and joint cases unless the spouses are separated), and
• whether marital adjustment deductions used to reduce income will help one spouse qualify for an individual filing.

Because the bankruptcy type you choose will also affect your decision-making process, start by learning about the differences between Chapter 7 and 13.

Joint Bankruptcy Filings for Married Couples

Bankruptcy law allows married couples to file a bankruptcy petition together in what is known as a joint case. While it makes sense for most couples to file jointly, it isn't the best route for everyone.

Benefits

Both spouses can wipe out qualifying debt in one fell swoop when filing together, including debts they incurred as a married couple and individual bills they're each solely responsible for paying. But that's not all. Filing a joint petition can save money, too.

The court filing fees are the same for individual and joint bankruptcy cases. But if you file two individual matters, you'll pay the filing fee twice—$676 for two individual Chapter 7 cases instead of $338 for one joint bankruptcy (as of December 2020). And most bankruptcy lawyers charge the same amount for couples filing together as they do for one individual matter—or sometimes just a few hundred dollars more.

Also, filing jointly is more convenient and efficient. Married couples complete only one petition, which is significant considering that the average petition is about fifty pages in length. Joint filers also attend the 341 meeting of creditors together—the mandatory hearing all debtors must attend—and discharge qualifying debts through a single bankruptcy discharge order. Plus, it's more straightforward for the bankruptcy court and trustee to resolve property issues, eliminating time-consuming hearings, thereby streamlining the process.

Drawbacks

Some states don't allow married couples to double property exemptions in a joint bankruptcy—the laws that let you protect assets you'll need to work and live. Depending on your state's laws, you might not be able to protect as much property if you file together. If one spouse owns many separate nonexempt assets—property a filer can't protect with an exemption—it will be lost in Chapter 7 or need to be paid for through a Chapter 13 repayment plan. It might not make sense if filing jointly will put those assets at risk.

The same logic applies if most debts are in the name of only one spouse. Filing a joint bankruptcy will negatively affect the credit rating of both spouses. It's often better to preserve one spouse's good credit so that it's available after the bankruptcy case.

Individual Bankruptcy Filings for Married Couples

Married people don't have to file for bankruptcy together, and sometimes it makes sense for only one spouse to file. But it can be tricky because, contrary to common belief, filers must include both spouses' income in individual bankruptcy.

Benefits

Sometimes people with extremely different financial situations get married before realizing that significant debt problems exist. For instance, one spouse might have an excellent credit rating and have acquired substantial property before marriage. By contrast, the other might have accumulated considerable debt, a 450 credit score, and a storage space of crafting supplies (which could be quite valuable and probably wouldn't be protected in bankruptcy). In many cases, individual bankruptcy will wipe out the indebted spouse's qualifying debt without negatively affecting the non-filing spouse's credit or property.

Other benefits exist, too. For instance, some states don't allow joint filers to double exemption amounts in a joint petition. In those states, you might be able to protect more property by filing two individual bankruptcies. However, keep in mind that if you live in a community property state, all community (marital) assets are property of the bankruptcy estate, no matter who is on the title, even when only one spouse files for bankruptcy.

To learn more, see What Happens to Jointly Owned Property in an Individual Bankruptcy?

Drawbacks

If both spouses need to file for bankruptcy relief, filing two individual cases will result in higher court costs and attorney fees. Further, in most cases, one spouse's bankruptcy filing won't offer any protection to the non-filing spouse from creditors. But there are exceptions.

If you have joint debts, the non-filing spouse will be protected by the codebtor stay in Chapter 13 bankruptcy. Also, if one spouse discharges a joint debt in community property states, a creditor can't go after any community property to satisfy the non-filing spouse's obligation. Keep in mind that this rule is strictly construed and won't apply to other situations, such as a debt that one spouse must pay under a marital settlement agreement in the other spouse's name. (Assessing responsibility this way isn't wise if it's likely one spouse will file for bankruptcy after divorce—consult with a family law attorney knowledgeable in bankruptcy law.)

A couple that makes too much money to qualify for Chapter 7 won't be able to get around a Chapter 7 means test failure (the test you must pass to be eligible for a Chapter 7 discharge) by having one spouse file an individual Chapter 7 case. If you're experiencing this common problem, the rest of this article is for you—keep reading.

Married Individuals Must Include the Non-Filing Spouse's Income

People tend to believe that they can get around a Chapter 7 qualification issue if only one spouse files—but it isn't the case. An individual filing won't solve an income-related means test problem. Why? A married filer must include both spouses' incomes when filing for individual bankruptcy unless the spouses are separated.

Because you must include the non-filing spouse's income on the means test if you share a household, if your spouse has a significant income, you'll typically have a more challenging time qualifying for Chapter 7 bankruptcy.

However, that's not the end of the analysis.

The Marital Adjustment Can Help Married Individuals Qualify for Chapter 7

The means test considers that you might not use all of your spouse's income to pay household expenses. It allows you to deduct the portion of a non-filing spouse's income used to pay for another household or the non-filing spouse's separate debts.

Marital Adjustment Deductions

Bankruptcy courts have differing views on what expenses the marital adjustment deduction covers. The following are examples of the types of expenses that might qualify as marital adjustment deductions:

• your non-filing spouse's payroll deductions such as taxes, insurance, union dues, and retirement contributions
• payments your non-filing spouse makes on his or her 401(k) loans
• your non-filing spouse's payment responsibility for credit cards, student loans, or other separate individual debts
• car loan payments and other expenses such as gas, maintenance, and insurance for your non-filing spouse's car
• alimony, child support, or other support obligations of your non-filing spouse from another marriage or relationship
• payments on attorneys' fees incurred by your non-filing spouse
• mortgage, home insurance, and other expenses for real property owned by your non-filing spouse alone
• your non-filing spouse's cell phone expenses, and
• gym membership, entertainment, and other recreational costs of your non-filing spouse (courts differ when evaluating expenses allowed for recreation and entertainment).

Be Prepared to Document Marital Adjustment Deductions

If marital adjustment deductions make the difference between passing or failing the means test, your bankruptcy trustee will want to see documentation showing that your non-filing spouse pays those expenses. Be prepared to provide it in support of any marital adjustment deductions claimed on the means test.

Learn about other expenses that can help you pass the means test.