Bankruptcy and the Non-Filing Spouse

Spouses don’t always file for bankruptcy together—especially when one spouse has a good credit rating to preserve. Keeping it will often allow the couple to make a large credit purchase later if needed.

However, downsides exist. The debtor must usually include the non-filing spouse’s income, and the non-filing spouse will typically remain responsible for any joint debts. Read on to learn more about the effect of bankruptcy on your non-filing spouse.

If you’d like more filing considerations, see Should I File for Bankruptcy?

A Non-Filing Spouse’s Income in Bankruptcy

The income rules that apply to non-filing spouses differ slightly in Chapter 7 and Chapter 13.

Chapter 7 Bankruptcy

Many people would prefer filing for Chapter 7 when possible. Debtors quickly erase qualifying debt without paying into a repayment plan. However, many people have difficulty meeting the income requirements and passing the Chapter 7 means test.

A couple whose combined income is too high might wonder whether they can fix the issue by having only one spouse file. While it would seem to make sense, one spouse filing alone generally won’t help a marital qualification problem. Here’s why.

When completing the means test, a married couple living together must declare the income of both spouses, even when only one spouse files for bankruptcy. Most couples won’t be able to use one of three exceptions that can reduce a non-filing spouse’s income or omit it entirely.

• Marital adjustment. The filing spouse can deduct any portion of the non-filing spouse’s income that isn’t used for the debtor’s household expenses or to support the filer’s dependants. For example, you’d use the adjustment to deduct income used to pay the non-filing spouse’s separate debt, such as income tax debt or domestic support for a child from another relationship.
• Separate households. If the married couple is together but lives in different homes, the spouse's income must be included, but the expenses of both households can also included in the bankruptcy. This rule accounts for spouses who work in different cities or states and similar situations.
• Legal separation. A legally separated filer doesn’t need to include the non-filing spouse’s income.

Chapter 13 Bankruptcy

A Chapter 13 debtor must pay into a three- to five-year repayment plan, so it takes longer to complete (although there are many good reasons to file for Chapter 13, even if qualified for Chapter 7). In the plan, unsecured creditors are entitled to receive their share of the couple’s monthly disposable income or the value of the nonexempt property, whichever is greater.

• Unsecured creditors hold debts not protected with collateral, such as most credit card balances, medical bills, and personal loans. Examples of secured debt include mortgages and auto payments.
• Nonexempt property isn’t protected by bankruptcy exemption laws, the laws that explain the assets a filer can keep in bankruptcy. A filer must add up the value of any property not covered by an exemption and pay at least that much to unsecured creditors.

The means test rules in Chapter 7 apply in much the same way in Chapter 13, but there are some differences.

• Marital adjustment. As in Chapter 7, this adjustment allows the debtor to subtract the portion of the non-filing spouse’s income that isn’t used to support the filer’s household.
• Separate households. A non-filing spouse’s income must be included in a Chapter 13 case, even if the spouses live in two different homes. The filer might be able to offset the costs using the marital adjustment.
• Legal separation. Chapter 13 doesn’t distinguish between marriage and legal separation. A married debtor must include the income of the non-debtor spouse.

Find out about the steps involved in a Chapter 13 bankruptcy.

A Non-Filing Spouse’s Joint Debt

Filing bankruptcy discharges the filer's debt only—not a non-filing party. If a couple has joint debt, but only one spouse files for bankruptcy, the non-filing spouse will remain responsible for the obligation.

Protections for non-filing spouses exist, however, but again, don't always apply.

• Community property protection. In a community property state, a non-filing spouse receives partial protection. When one spouse discharges a joint debt, a creditor can’t later use community property assets to pay the debt. However, this protection ends on divorce or death because the couple no longer exists as a “community.”
• Chapter 13 automatic stay. In Chapter 7, the automatic stay doesn’t protect a codebtor (or non-filing spouse) from creditor collection. The creditor can pursue whatever rights might exist against the non-filing spouse. In Chapter 13, the automatic stay covers codebtors as long as it remains in effect. If the debtor can pay the debt through the repayment plan, the codebtor won’t be subjected to collections. Even so, a creditor can file a motion to lift the automatic stay and proceed against the non-filing spouse. Also, if the debtor filed previous Chapter 13 cases, the automatic stay might not be in effect at all.

Learn more about joint debt in bankruptcy.

A Non-Filing Spouse’s Property in Bankruptcy

Any property titled or deeded to the non-filing spouse exclusively won’t be included in the debtor’s petition. However, in a community property state, all property acquired after the marriage will be included in the estate. Find out more about the assets of the bankruptcy estate.

When Spouses Shouldn’t File Together

Sometimes, spouses' interests don’t align. For instance, a debtor’s separate property becomes part of the bankruptcy estate. If the assets couldn’t be protected with a bankruptcy exemption, the property could be used to pay the other spouse’s debt—a result easily avoided by not filing a joint bankruptcy. This situation can result in a filer's separate property being used to pay a spouse's separate debt, which can become very expensive if both are substantial.

Also, it's often a good idea for spouses to streamline a divorce by filing together and wiping out debt. However, their interests might not match in some cases, and they'd be better served by consulting with separate counsel before filing jointly.

Learn more about filing for bankruptcy before divorce.

Consult With a Local Bankruptcy Lawyer

This article provides an overview only. Because laws vary by state and each case is unique, it’s essential to consult with a local bankruptcy attorney to learn how state law applies to your matter.