Just about every single one of our married bankruptcy clients filing individually ask us how the bankruptcy will affect a non-filing spouse. In Michigan, the answer is generally not at all.
The spouse of a bankruptcy filer will have to do some leg work, account for income and expenses, provide pay stubs for the seven months before filing, and may need to provide income tax returns (if not filed jointly) for the last two years. Outside of the budgetary concerns of bankruptcy, a non-filing spouse has little if anything to do with the case.
Budget
The reason why we need income and expense verification for a bankruptcy client’s non-filing spouse is that we have to report household income and expenses. The report is made on official bankruptcy forms, filed with the bankruptcy court, and is made under the penalty of perjury. If it is incorrect, our client could be in serious trouble with the bankruptcy Court and the Department of Justice. So we absolutely need to be honest about the household’s income and expenses.
Bankruptcy is very much budget based. For Chapter 7 bankruptcy, we need to show the inability of our client to repay his or her creditors in a repayment plan by using household disposable monthly income. In Chapter 13 bankruptcy, our client repays his or her creditors over a three to five year period at the amount of disposable monthly income the household has. In each case, disposable income is defined under bankruptcy law as money left over after necessary expenditures for the household. Many times we are able to take the non-filing spouse’s individual expenses in bankruptcy and they still count towards the household.
Our hope is that the non-bankruptcy-filing spouse is active and helpful in getting items for our client’s case. Cooperation makes a world of difference as the case progresses.
Assets
Many bankruptcy filers fear their non-filing spouse will lose assets to the bankruptcy trustee for distribution to the creditors. This is simply untrue. When we file bankruptcy, the only assets that are recoverable by the bankruptcy trustee are those owned by the individual(s) filing the case. The creditors cannot go after a spouse’s assets – or a friend or family member’s assets either. You should discuss all of your assets, potential assets, and bankruptcy property exemptions (to protect your assets from creditors) with your bankruptcy attorney.
Liabilities
Many bankruptcy filers fear that their creditors can sue their non-filing spouse after the bankruptcy is complete. At least in Michigan, this is completely wrong. Personal liability is not inherited by family members or spouses unless they actually agree to it in the first place. There is no other mechanism to imply liability for consumer debt outside of that agreement by the non-bankruptcy-filer. If your spouse never signed for a car loan or credit card, they can never be sued. Bankruptcy does not change that fact.
If a non-bankruptcy-filing spouse, however, was a co-signer on a debt, they will still remain liable on that debt. The filing of bankruptcy by a spouse does not eliminate debt on a non-filing spouse (or any other co-debtor). Those debts must be paid.
Sometimes debts with joint responsibility with a bankruptcy filer may show on the credit report of the non-filer as in bankruptcy. Typically, a call to the creditor by the non-bankruptcy-filer will resolve this. If not, a letter to the credit reporting bureau will. While inconvenient, it is a short process and has little if any long-term effect on the non-bankruptcy-filing spouse.
As related above, bankruptcy by one spouse in a marriage has a very small effect on the non-bankruptcy-filer. All of these issues should be discussed with your bankruptcy attorney to determine the best course. It is rare that we have ever advised someone to not file bankruptcy because of the effect on a non-filing spouse.
