Bankruptcy is a serious financial decision and is often accompanied by several questions; one of the major ones is about its impact on the family. The most common question spouses ask is, will bankruptcy affect my spouse’s credit? Many wonder if filing for bankruptcy will impact their spouse’s credit or assets, and the answer depends largely on whether the debts are shared or individually held.
In general, the answer is “no,” but where things get nuanced depends upon the facts regarding jointly held debts and income figures used in preparation for a bankruptcy case.
Can Bankruptcy Harm My Spouse’s Credit?
If only one spouse files for bankruptcy, it should not appear on the other spouse’s credit report or affect their credit score directly. Bankruptcies are tied to Social Security numbers, so if the spouse doesn’t show up in the bankruptcy filing, chances are that his or her credit will not be affected. In most instances, if one spouse has only a few joint debts, it becomes easier for many to file for bankruptcy without affecting their partner’s finances unnecessarily. Filing for bankruptcy separately ensures that the other spouse can keep their credit and possessions undisturbed.
Shared Responsibilities and Bankruptcy
Identify whether the spouses have any shared responsibilities. If the spouses hold joint accounts, there will be a circumstance in which the debt will be left to the non-filing spouse totally, even if the other spouse can clear out his or her share through the bankruptcy process. The accounts could include mortgages, auto loans, and joint accounts held on credit cards, though if only one spouse files for bankruptcy, then only that person’s liability for that account will be covered in bankruptcy. That is to say, even though the obligation of the filing spouse may be discharged, the other spouse is liable for the joint debt.
If most of the debt is privately owned, then only one of the spouses will make the filings. This scenario usually serves well if it may help allow the non-filing spouse to preserve their credit standing. Filing separately will protect their credit profile, which will be a very good thing when the couple needs to qualify for future loans-if refinancing their home, for example.
Rebuilding Your Credit After Bankruptcy
The non-filing spouse is often a priceless assistant in helping the filing spouse reestablish his or her credit history following the bankruptcy. Doing this could provide the opportunity for the filing spouse to become an authorized user on some of his or her credit cards, or to co-sign with the filing spouse on a new credit card or loan. These acts will help the filing spouse begin to reestablish creditworthiness.
The non-filing spouse may be interested in tacking the filing spouse’s name onto his car title or his mortgage after the latter’s credit improves. These shall enable the couple to work together and re-establish the credit profile of the filing spouse.
Income Issues in Bankruptcy: Means Test and Marital Adjustment
Even in cases in which one spouse has filed for bankruptcy, the incomes of both spouses will often be taken into account to decide whether the applicant qualifies. In order to qualify for Chapter 7 bankruptcy, the spouse applying for bankruptcy will be subject to a “means test,” that measures household income to ensure the applicant does not have the resources to pay off debts. The means test accounts for all household income, regardless of which spouse is filing.
Some are exempt from the means test, which includes:
- Active-duty military personnel and members of the National Guard or military reserve
- People whose business debt exceeds their debt
- Disabled veterans in certain situations
For those who do have to go through the means test, a marital adjustment deduction may be applied. That deduction allows the filing spouse to exclude some personal expense items of the non-filing spouse, such as their personal debts or personal expenses the filing spouse doesn’t pay for. Through these deductions, the filing spouse can often qualify for Chapter 7 without the non-filing spouse’s expenses inflating the calculation of the household income.
Chapter 13 Bankruptcy and Household Finance
If the filing spouse fails to pass Chapter 7 bankruptcy through the means test, then there is Chapter 13. A Chapter 13 bankruptcy involves a plan, which is administered by the court, to pay some or all of a filer’s debts over a certain period of time. Unlike Chapter 7, Chapter 13 does not relieve some or all of its qualified debts but rather demands partial or full payment.
Even as the court calculates the Chapter 13 repayment plan, its foundation is still the household income, which includes the other spouse’s income even if this spouse does not file.
This does not directly impact the other spouse’s credit, but will bankruptcy affect my spouse’s credit indirectly by influencing how much the filing spouse would have to pay each month toward paying off their debts.
Factors to Consider Before Assuming a Spouse Shall Be Excluded from Bankruptcy:
The question of whether to file jointly or individually is best determined after reviewing the debts, assets, and marital financial situation.
Considerations include the following:
- Joint Debts: If most of the debts are in a joint capacity, then it is advantageous for both spouses to file together. Filing jointly may smooth the process of responsibility discharge for shared debts and protect the non-filing spouse from creditors.
- Asset Ownership: If the couple owns all of their assets, such as a house or a car, jointly, then filing separately may disrupt the asset protection. If only one spouse files, then the court will review all of the couple’s jointly held assets and may take a portion of the ownership that belongs to the filing spouse if exemptions cannot cover it.
- Income Attribution: If the income of one spouse substantially determines eligibility under Chapter 7, filing separately may result in a marital adjustment deduction. The decision may also determine whether the filing spouse has to file Chapter 13.
The decision as to whether a spouse must be excluded from bankruptcy proceedings must be well-informed regarding immediate and long-term effects. It is highly suggested to seek a bankruptcy attorney to help you determine the complex decisions and the specific needs that will serve best for you and under which circumstances.
The Role of the Attorney in Determining Inclusion or Exclusion End
Bankruptcy law is complicated, particularly when related to the means test and what the best decision might be for a couple who are married. The world of bankruptcy attorneys is going to significantly make a difference in your outcome.
An attorney can:
- Examine joint and separate debts
- Assess possession of assets as well as eligibility for exemptions
- Determine whether Chapter 7 or Chapter 13 better suits their needs
- Deal with means testing and marital adjustments on deductions
- Suggest how a filing arrangement can be structured to minimize risk to both spouses.
Summing Up!
Bankruptcy can be such a stressful financial decision for couples since one spouse may need to declare bankruptcy, but both have been affected by the decision. After all, understanding will bankruptcy affect my spouse’s credit is crucial in navigating this process. A review with attorneys from Bruner Wright PA can then help decide whether to file together or separately. This kind of careful planning would ensure that the credit and assets of the non-filing spouse remained as protected as possible while the filing spouse received a fresh financial start.
Ask Bruner Wright Today!
We can help you with everything from reorganization to managing cross-border bankruptcy, to navigating complicated litigation. We tailor our approach to meet your specific needs, while also laying the foundation for your long-term success.
Call a bankruptcy lawyer today to learn more about your Chapter 7 bankruptcy options. Start fresh and get the relief you require! Call Bruner Wright today to schedule a consultation and learn how you can achieve financial freedom.