One of the most common questions we hear as bankruptcy attorneys is whether a married couple should file together. The unfortunate answer, as always is “it depends.” Very often, married couples will have joint finances. This means bank accounts, mortgages, credit cards, and some bills may be in the name of both spouses. But what happens if only one spouse files for bankruptcy relief? What happens to the authorized user when the account holder files for bankruptcy? What about the co-signor? In this blog post, we will explore options of married couples, and even authorized users, in filing for bankruptcy.
Non-Exempt Equity Explained
Regardless of which chapter of bankruptcy a debtor intends to file, they will need to first determine their non-exempt equity in property. While this sounds like complicated legal jargon, it is actually a relatively straightforward analysis. For the next few paragraphs, let’s use a potential debtor example.
Say a debtor owns their home worth $300,000, a vehicle worth $10,000, and has a bank account with $5,000 in it. The home has a mortgage of $2000,000, and the vehicle is financed with $5,000 remaining on the loan. This would mean the debtor’s actual equity in property is $110,000. This comes from the $50,000 remaining in equity from the home after the mortgage is subtracted, $5,000 in equity from the vehicle after the loan is subtracted, and $5,000 in equity in the bank account. For real estate, we can also subtract the cost of a hypothetical sale. For the sake of this example, we will omit that amount.
Next, we determine what exemptions need to be used. Exemptions are the amount that, in a hypothetical chapter 7 liquidation, a debtor would be entitled to regardless of the amount owed. We would likely use federal exemptions, meaning we could exempt $27,900 from the home, $4,450 for the vehicle. After exemptions are applied, there is a remainder of $77,650. This is the non-exempt equity in assets. This means that, in a chapter 13 case, we would likely need to repay (roughly) $77,650 over the course of the five-year plan, plus court costs and fees.
Effects of Spouses Filing Together
When spouses decide to file for bankruptcy together, they each have the ability to use their own exemptions. Exemptions are not automatic, and the debtors must elect to use them. This means that the spouses can essentially “double up” on the exemptions for the property they own together. Using the above example, if that debtor was married and their spouse filed with them, they would be able to exempt $55,800 from the real estate. This obviously lowers the amount of non-exempt equity by a very substantial amount.
It is important to remember that exemptions are only allowed on property that the debtor owns. If the wife purchased the real estate prior to marriage, and he was never added as an owner, then that property cannot be exempted by the husband. More commonly, if the vehicle is only owned by one spouse, only that spouse may use their exemption. Further, if only one spouse is on all the vehicles being used by the family, only the spouse with title to the vehicles may use the exemption on them.
Spouses may also elect to file together to save on costs. If both spouses separately owe substantial amounts of money to various creditors, filing together will allow them to use the same attorney, save on filing fees, and have a more streamlined case.
Effects of Spouses Filing Separately
If one spouse decides not to file, or files a separate bankruptcy, only the filing spouse may use the bankruptcy exemptions. However, the filing spouse does need to split their equity in half. Because the non-filing spouse has a legal claim to the property, the equity is split after the mortgage is taken into account. Using the above example, this would mean we taken the $300,000, subtract the $200,000 mortgage, and then divide by 2. This means the spouse filing for bankruptcy would have equity in the property worth only $50,000, and would then be able to use their exemptions, bringing their non-exempt equity to roughly $22,100.
It is important to note that if only one spouse files for bankruptcy relief, the other spouse will still be liable for any debts that are shared between the couple. This means if both spouses are liable for a credit card or personal loan, the non-filing spouse will still be on the hook for making the agreed upon payments even after the debtor spouse has filed.
Effects of on Authorized Users
Another question clients often have is what happens to their authorized users on their accounts. Generally, when a person files for bankruptcy, their account with a given credit card is closed. Almost every credit card company or bank will immediately close the account of a debtor upon receipt of the notice of bankruptcy so as to avoid any accidental violations of the automatic stay, and to prevent further debt being accrued without bankruptcy court approval. But what happens to the authorized user?
Generally, they are unaffected. They will not be liable for any of the debt accrued, as the authorized user is simply using the credit of the individual that filed for bankruptcy. The account holder would be liable for all debts accrued across all accounts, and the authorized user would not be liable for those debts, nor would the filing affect their credit score. The only affect the authorized user will feel is the account will be closed, and they will no longer be authorized to use it.
Effects on Co-Signors
Finally, what happens to a co-signor when the actual borrower files for bankruptcy? Unfortunately, the same outcome that would happen if the borrower defaulted on the loan. The co-signor ultimately becomes liable for any amount still owed by the principal borrower. If the co-signor were to file for their own bankruptcy, they may be relieved of the burden of that agreement. Otherwise, a co-signor remains liable for the agreement as if the borrower failed to pay the agreed upon payments.
Conclusion
Determining whether a married couple should file together or separately can be a difficult, strategic decision. It is important to retain a bankruptcy attorney you can trust has the knowledge and experience to properly advise of the next best steps. Call today for a free consultation.
