Filing bankruptcy with or without your spouse affects the protection from creditors each of you receives, and also affects whether you file under Chapter 7 or 13.
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Continuing from the last blog:
- There are consequences to filing separately or together, consequences affecting:
- protection from your creditors’ collection activity.
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Bankruptcy Only Protects Bankruptcy Filers, Right?
Start with the sensible proposition that if you want bankruptcy protection from your creditors, you need to file bankruptcy to get it. Sounds obvious and sensible, but it’s only partly true.
It’s True in Chapter 7
If you file a Chapter 7 straight bankruptcy case by yourself—without your spouse—and one of your debts is owed by both you and your spouse, the creditor will be able to continue pursuing your spouse to pay that debt. That’s because the “automatic stay” which stops creditors from collecting debts immediately upon the filing of a Chapter 7 bankruptcy only protects the person who files. The section of the federal Bankruptcy Code which provides for the “automatic stay” says that it stops “any act to collect… a claim against the debtor.” And a “debtor” is a person who has filed a bankruptcy case.
So if your spouse did not join in your bankruptcy case (and didn’t file his or her separate case), nothing stops this spouse’s creditors from pursuing the debts owed by him or her. And that includes debts that the two of you owe jointly. That’s the simple reason that usually married folks file joint bankruptcies—besides any individual debts each may have, most spouses have joint debts which both spouses need protection from.
But Chapter 13 Could Protect a Non-Filing Spouse
Bankruptcy CAN protect a co-obligor, such as a spouse, in a limited but potentially crucial way, ONLY under Chapter 13. The “co-debtor stay” of Chapter 13 extends the “automatic stay” immediately upon the filing of the case not just to the filing “debtor” but to also to co-debtors—“any individual that is liable on [a consumer] debt with the debtor.” A spouse who does not join the other spouse’s bankruptcy filing is a protected by this “co-debtor stay” as to any of their joint consumer debts.
But this protection comes with conditions. If the creditor challenges the co-debtor stay as to the non-filing spouse, the bankruptcy court will allow the creditor to pursue him or her EXCEPT to the extent the filing spouse is paying that debt through the Chapter 13 case. So the filing spouse can fully protect the non-filing spouse by arranging through the Chapter 13 plan to pay that debt in full. That way the debt is slowly paid off during the 3-to-5-year plan while both are protected from collections—the filing spouse by the “automatic stay” and the non-filing spouse by the “co-debtor stay.” Chapter 13 debtors are generally allowed to favor such consumer joint debts in their plans over other non-joint debts in order to protect co-debtor. So if the amount of such joint debt is relatively modest, this can be a way for only one spouse to file bankruptcy and still protect the other spouse from a joint creditor or two.
Since the “co-debtor stay” is available only under Chapter 13, IF there are good reasons for only one spouse to file bankruptcy, AND both spouses are liable on a limited amount of consumer debt, THEN Chapter 13 could well be the better option.