Understanding Chapter 13 Bankruptcy Law
Debtors who are considering filing bankruptcy need to decide between Chapter 7 or Chapter 13. Both have an equally devastating impact on a debtor’s financial future and may present problems if they need to be bonded for work, apply for a loan or try to undertake other financial obligations.
Chapter 7 bankruptcy is the part of the Bankruptcy Code that allows the debtor to eliminate most debt, if they meet the requirements. In most situations, this is used by debtors who have no assets or only have assets that are considered exclusions under the Bankruptcy Codes. Chapter 13 bankruptcy, on the other hand, is generally used by those debtors who have the financial means to repay their debt if it is restructured to lower monthly payments. Chapter 13 may be filed by an individual or may be filed jointly when debts are owed by more than one person. Some small business owners who are trying to restructure the debt of their business may also consider filing Chapter 13.
Community property states may require couples file together. In fact, in some instances if a Chapter 13 is filed by one spouse in a community property state, the creditor may attempt to go after the non-filing spouse for any amount of debt removed by the trustee. Homestead laws can also be impacted, as was seen in the case Kim v. Kim, No. 3:09-CV-1082-N, and the filing spouse may lose part of their homestead exemption. These types of complications often lead to the need to make a decision about adding a non-filing spouse to a Chapter 13 bankruptcy.
This can be done but there are warnings and problems that could occur.
Why Spouses May Not Be Included in the Original Filing
While in most cases a bankruptcy filing by a married couple will involve the debts of both partners, this is not necessarily always true. There are some specific instances where a filing may be done by one spouse only including (but not limited to):
Debts of only one partner - Married couples often take on debt separately. In states where there is no requirement for both spouses to assume the debt, only one may have applied for credit cards or other credit in their name. Sometimes one partner has a business venture as a sole proprietorship that may have caused the debt. This would impact only the one spouse;
Prior to marriage debt - Not every couple starts off their married life free from the debt incurred while they were single. In these cases, one partner may elect to file bankruptcy in order to resolve the debts that were incurred while they were single. For many, this makes more sense than having both partners credit damaged by a bankruptcy filing;
Income restrictions - If only one spouse works, there is often a sense that it does no good to add the non-working spouse to the bankruptcy filing if they do not have any debts in their name. This also prevents a lowering of the spouses FICO report;
Legal separation - Generally if a couple of legally separated at the time of the bankruptcy filing, they may elect to not be included in the bankruptcy filing.
It is important to note that with very few exceptions that there is no requirement that both spouses be included in the filing.
Changing the Bankruptcy Plan
If for some reason a decision is made to add a non-filing spouse to a Chapter 13 bankruptcy filing, it is imperative to speak with the trustee as well as the bankruptcy attorney. Chapter 13 filings are accompanied by a repayment plan. This plan covers a three to five year period for repayment of the debts that are owed to creditors, including mortgage holders, auto loan holders and credit card companies. If part of the filing is to include business debts, the records may be required by the bankruptcy attorney as well.
Repayment plans under Chapter 13 are based on not only the amount of debt that is owed, but also the calculation of disposable income. Before a bankruptcy filing is modified for the purposes of adding a non filing spouse to a Chapter 13 bankruptcy it is important to look at what changes may be made to the plan. If the decision is made to go forward the process is as follows:
Contact bankruptcy attorney - at all stages of plan modification, the attorney handling the bankruptcy should be involved. The attorney should work with the filing parties to make sure that a modified plan will not be detrimental to their financial status;
Determine if additional debts are to be added - if there are additional debts to be included in the bankruptcy make sure that the creditors’ names, address and account numbers are provided;
File new plan with trustee - a modified plan must be submitted to the trustee for approval. This modified plan should include a properly thought out repayment plan as well;
Wait for trustee approval - until the truustee has approved the modification, continue paying the pre-modification amounts.
The decision to add a non-filing spouse to a Chapter 13 bankruptcy is not one that should be taken lightly. Before making this decision, couples should examine all of their options and speak with their attorney to ensure that this option is the best one for their particular needs.
- Lexis Nexis: Sather, Stephen: Bad news for the non-filing spouse: https://www.lexisnexis.com/community/bankruptcylaw/blogs/bankruptcylawblog/archive/2010/08/24/bad-news-for-the-non-filing-spouse.aspx
- US Courts Chapter 13 Bankruptcy: https://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Chapter13.aspx
- Nolo: Overview of Chapter 13 https://www.nolo.com/legal-encyclopedia/chapter-13-bankruptcy-overview-30099.html