Filing bankruptcy with or without your spouse affects the liabilities you can discharge.
The last blog post was about how filing bankruptcy without a spouse affects creditors’ collection efforts against that spouse. In a nutshell, there is NO “automatic stay” protection for the non-filing spouse from joint creditors under Chapter 7. But there IS some important protection under Chapter 13 through the “co-debtor stay.”
The “automatic stay” and the “co-debtor stay” are temporary protections that go into effect immediately at the filing of a bankruptcy case and usually last through the length of the case.
Today’s topic is the “discharge”—the permanent legal write-off of a debt which happens at the end of a successful Chapter bankruptcy case.
Debts Are Personal
A debt is a personal liability. Discharging a debt in bankruptcy is not so much a total destruction of that debt as a legal pronouncement by court order that an individual is no longer personally liable on that debt.
Since each individual owes a debt personally, each spouse is not automatically liable for the other spouse’s debts. So if ALL of a couple’s debts are legally owed by only one spouse, and those debts are of the type that can be discharged in bankruptcy, then a bankruptcy filed separately by only that spouse will leave both spouses not liable on any debts.
Chapter 7 Discharges the Filing Spouse’s (or Spouses’) Debts
But most spouses have at least some joint debts. Usually the spouses each have some individual debts and some joint debts.
If they file together a JOINT Chapter 7 bankruptcy, at the end of the case their personal liabilities on dischargeable debts will be discharged. This includes debts that each spouse owes individually, as well as those for which they are both legally liable.
However, if only ONE of two spouses files a Chapter 7 case then only that spouse’s personal liability on the debts will be discharged. That includes debts that only that spouse owes individually, as well as his or her obligation on any debts owed jointly with his or her spouse. But none of the non-filing spouse’s liabilities would be discharged. That includes debts that only that spouse owes individually, as well as his or her liability on any debts owed jointly with his or her spouse.
Distinguishing between Individual and Joint Debts
The consequence of this is that one spouse should not file bankruptcy without the other, unless they know exactly how much debt the non-filing spouse is legally liable for, and they know how that debt will be handled.
Determining whether a debt is a joint or separate one is not always clear. A seemingly non-liable spouse can in fact be legally liable on a debt in numerous possible ways. A creditor’s monthly bill that is addressed to only one spouse does not necessarily mean that the other spouse did not sign and become obligated under the original loan agreement. Under many states’ laws a spouse is obligated for the other spouse’s debts under certain circumstances. Also, specific creditors—such as the IRS—are favored with special laws creating liability for the other spouse. So both spouses’ debts need to be reviewed carefully to see who is liable on each contractually and as a matter of law.
The Role of the “Co-Debtor Stay” in Chapter 13
Under the special “co-debtor stay” of Chapter 13 the filing spouse has the opportunity to protect the non-filing spouse during the course of the 3-to-5-year case. But if the debt is not paid in full during the case then the creditor can pursue the non-filing spouse once the case is over. That’s true even though the filing spouse’s liability for the same debt is discharged at the end of that Chapter 13 case.
The filing spouse usually CAN protect the non-filing spouse by arranging to pay the joint debt in full through the Chapter 13 payment plan. Also, usually the plan can favor the joint debt to the detriment of the individual debts of the filing spouse—in other words, paying that joint debt in full by paying that much less to the individual debts.
Imagine a husband and wife owing $4,000 on a credit card that the husband used to operate his business, but the wife co-signed. If only the husband files a Chapter 13 case, the “co-debtor stay” would immediately prevent the credit card creditor from pursuing the wife. His Chapter 13 payment plan would earmark enough funds to pay off that $4,000 (plus interest) in full, with the other creditors getting that much less money during the life of the plan. Then at the end of the husband’s Chapter 13 case that joint debt would be paid in full, leaving no liability for either spouse.
Be very cautious about filing a bankruptcy case without your spouse. Discuss your debts thoroughly with your attorney, getting strong verification that the non-filing spouse is not liable on any of the debts. If the non-filing spouse does have a personal debt or two, arrange for how it’s going to be paid. Consider using the “co-debtor stay” to protect the non-filing spouse on a joint debt by giving the filing spouse time to pay off the debt(s) in full through the Chapter 13 payment plan. That way there would be no remaining liability for the non-filing spouse at the end of the Chapter 13 case.