Couples can file bankruptcy separately or together. One of the factors of that choice is the amount of assets that can be protected.
Last week I introduced the issue about filing bankruptcy with or without your spouse by making clear that each spouse has a separate legal right to decide whether or not to file.
Each person needs to see clearly what the consequences of this choice are to them personally and to the two of them together. Then each gets to decide whether her or she wants to file a bankruptcy case or not, and if so whether to do so jointly with the other person.
In considering the consequences of filing separately or together, I gave the following list last time:
- the preservation of your assets
- protection from creditors’ collection activity
- dealing with the IRS and any other income tax authorities
- the discharge of your debts
Today’s blog post covers the first item on this list.
Preserving Assets in Bankruptcy
Let’s first briefly look how your assets are protected in a consumer bankruptcy case. You are allowed to keep what you own through the power of property exemptions.
Most people who file a Chapter 7 “straight bankruptcy” case can keep everything they own because everything fits within the available exemptions. But in situations in which some assets don’t fit within the exemption categories and amounts, the bankruptcy trustee can take and sell those assets and pay the proceeds to the creditors.
Under Chapter 13 “adjustment of debt” cases the person filing can protect assets that are not covered by the available property exemptions by paying extra to the creditors over the course of a court-approved payment plan.
Filing bankruptcy alone instead of both filing jointly can effect on how well your possessions are protected by the property exemptions.
Doubling of Some but Not All the Federal and State Property Exemptions
Under the federal Bankruptcy Code each state has a choice. It can require its bankruptcy-filing residents to use that state’s set of property exemptions. Or the state can let its residents choose between the state’s exemptions and a federal set of exemptions.
Under the federal exemptions, two spouses filing bankruptcy together receive double the value of all the permitted exemptions that a single individual would receive. (See Section 522(m) of the Bankruptcy Code.) For example, there’s a $22,975 homestead exemption to cover equity in a home. That amount is doubled to $45,950 in a joint case filed by two spouses. (As of April 1, 2016 these amounts go up to $23,675 and $47,350, respectively.)
However, some state exemptions don’t increase the exemption amount at all for certain asset categories in a joint filing. For example, in Colorado an individual filing bankruptcy can exempt $60,000 of equity in a home (or $90,000 if the homeowner, his or her spouse, or a dependent are disabled or are 60 years old or more). When two spouses file a joint case, those amounts remain the same even though two people are involved. Note that Colorado requires its residents to use its exemptions so the federal ones aren’t available.
In some states the amounts are increased but not doubled. For example, in Oregon an individual’s homestead exemption is $40,000, with that exemption increasing only to $50,000 for a married couple filing jointly. Note that Oregon allows its residents to use either it exemptions or the federal one. In this case the $50,000 joint homestead exemption is still higher than the federal $45,950 one.
The point is that there can be advantages and disadvantages within the specific property exemption statutes to one spouse filing individually vs. both filing jointly. Each spouse needs to be very clear about the property-preserving consequences of joining in the bankruptcy case.