Posted December 2020
Filing for bankruptcy is a complicated decision, fraught with sleepless nights, guilt, stress, and uncertainty. There are so many what ifs. Adding to the uncertainty is a common question facing spouses: should we file bankruptcy separately, jointly, or should just one of us file? This post will discuss why it is sometimes best for only one spouse to file.
Practical reasons for just one spouse filing for bankruptcy
It is possible for a one debtor spouse to file for bankruptcy without the involvement of the non-filing spouse. This may happen if most of the debts belong to a single spouse. Perhaps the debts arose from a previous marriage that ended in a messy divorce, or the debts are from a business owned by a single spouse. Perhaps the non-filing spouse has large debts that will not be subject to discharge (e.g. student loan debt). Perhaps the non-filing spouse is just not interested in filing for bankruptcy. There are many reasons why only one spouse may file for bankruptcy.
The Legal Reasons for a one spouse bankruptcy
There may be many practical reasons to consider a single-debtor bankruptcy, but of course, the legal ramifications must also be evaluated closely. In Texas, if a married couple jointly files for bankruptcy, they often double their exemptions. Exempted property is not subject to seizure by the bankruptcy trustee to pay creditors. For more information on exemptions, see our article on bankruptcy exemptions here.
Note that not all property types are allowed an exemption, and virtually all exemptions have monetary caps. So, if only one spouse chooses to file, they generally receive only half of their exemptions. In addition to exemptions, the community property laws of Texas should also be considered.
You’ve perhaps heard that Texas is a community property state, but what does that really mean? If you are getting a divorce, it means that all property incurred during the marriage (except for property received via inheritance or gift) belongs to both spouses equally, regardless of whose name is on the deed/title or whose paycheck the income was derived. Many people are familiar with this rule, but forget about debt.
Clients call our office often saying something along the lines of “I want a divorce. We have no property together and no children. It should be an easy divorce, right?” Well our next question is always about debt…how much debt do you have together? Many divorces hinge on debt rather than property division. However, this post is not about divorce, it is about bankruptcy, and bankruptcy is all about debt. Happily, community property does NOT apply to bankruptcy filings…sort of.
When you file for bankruptcy in Texas more property is subject to seizure than in non-community property states because the bankruptcy estate includes both separate property of the filing spouse and community property. As discussed above, if one of you files separately, may not have enough exemptions to cover it all.
In addition, when one spouse files separately, individual and joint debts are dischargeable, but the non-filing spouse’s separate property could still be seized to satisfy debt for joint accounts. Obviously, the non-filing spouse will not receive a discharge for his or her separate debts, and there is no protection for his or her separate assets.
Still not over.
If after consideration of the practical and legal implications of filing separately, you determine that a single spouse bankruptcy is right for you, the non-filing spouse is still not entirely off the hook. The non-filing spouse will generally still be required to provide information about joint debts, his or her income, and joint expenses.
If you’re considering filing for bankruptcy, you don’t have to go it alone. Contact our office today to see how we can help!