What Happens When You File Bankruptcy in California?
Before we examine the relationship between bankruptcy and marriage, let’s start with a quick overview of how bankruptcy works.
The vast majority of debtors in California file for bankruptcy using Chapter 7 or Chapter 13, which are the two main types of personal bankruptcy. Here’s how they compare at a glance:
Chapter 7 BankruptcyChapter 13 BankruptcyProcess LiquidationReorganizationDurationAbout 4-6 months3-5 yearsDebts Discharged (Eliminated) Medical bills, credit card bills, personal loans, moreMedical bills, credit card bills, personal loans, moreAdvantagesFastest and simplest type of bankruptcy, no monthly paymentsRetain more property, possibly prevent foreclosureDrawbacksPotential loss of property and assets, slightly higher filing feeLonger duration, higher income requirements, monthly payments required
In Chapter 7, a trustee sells unprotected (nonexempt) assets to repay your creditors. You do not have to make a reorganization plan, and if you comply with all bankruptcy rules, your case should be discharged well within the year you file. In Chapter 13, you can keep your property as long as you continue to make full and timely monthly payments as directed by your reorganization plan. Through the plan, you can even stop foreclosure. The case is discharged after three to five years.
Filing Bankruptcy While Married Many couples contact our Roseville Chapter 7 lawyers with questions about bankruptcy and marriage. One of the most common questions we are asked is, “Can one person in a marriage file bankruptcy and not the other?” The simple answer is yes: you are not legally required to file bankruptcy with your spouse. Nonetheless, many married couples choose to file jointly due to the financial benefits which, in certain cases, may result from joint filing. You should keep the following questions and factors in mind when deciding, with help from your Folsom Chapter 13 lawyer, whether you should file jointly or individually.
Are most of your debts shared? Only the filing spouse gets debt relief and protection from creditors. If you and your spouse owe a debt together, but only you file for bankruptcy, creditors can come after your spouse demanding repayment. Your debts may have been discharged, but your spouse’s have not. That means he or she is still liable for:
His or her individual debts.
Debts he or she shares with you.
Likewise, do you share property or assets? When you and your spouse file jointly for Chapter 7, all of your property becomes part of the bankruptcy estate. Unless it is protected by exemptions, property in the bankruptcy estate can be sold by the trustee. If Spouse A owns valuable property or assets, it might make sense for Spouse B to file individually, so that Spouse A’s assets do not become part of the bankruptcy estate and thus vulnerable to creditors.
Do the benefits of filing jointly outweigh the initial damage to your credit scores? Though the damage can be repaired – in many cases, more quickly than you’d imagine – you need to prepare for the fact that bankruptcy will have a damaging effect on your credit score. If you file jointly, both of your credit scores will be impacted.
Can you double the bankruptcy exemptions by filing jointly? Bankruptcy exemptions help Chapter 7 debtors protect their property. In Chapter 13, exemptions impact payments under the reorganization plan, because certain creditors must receive, at minimum, the amount equivalent to what they would have received from the proceeds of a Chapter 7 liquidation. Though California prohibits debtors from doubling most exemptions, there are a few exceptions for exemptions where doubling may be permitted.
Can you both pass the mean test? When you file for bankruptcy, you must take a “means test,” which evaluates your income to determine whether you should file for Chapter 7 or Chapter 13. If you file jointly, all of your income will be counted. If you file individually, only your income will be counted. You may encounter a situation where you would be able to pass (be eligible for Chapter 7) by filing individually, but would fail if you tried to file jointly. Of course, depending on your reasons for declaring bankruptcy, you may want to file for Chapter 13, in which case failing the means test would not be an issue.
Are you both willing to file for bankruptcy? Joint bankruptcy filings must have consent from both spouses. You cannot force your spouse to file bankruptcy against his or her wishes. If your spouse does not want to file for bankruptcy, you may have little choice but to file individually. Though unusual, there are even cases where both spouses file bankruptcy individually, typically due to a disagreement about how to proceed with a joint filing.