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How Bankruptcy Affects Your Spouse

Steven C. Frazier, Attorney At Law July 5, 2024

Frustrated Couples in kitchen looking at financial documentsBankruptcy might seem like the ultimate solution to all your financial woes. But if you're married, filing for bankruptcy could affect your spouse, too.  

This is a complex issue with many factors to consider. Let me explain what happens when one spouse files for bankruptcy and the potential effects on your spouse's credit, property, and financial future.  

Intro to Bankruptcy

Bankruptcy is a legal process designed to help individuals or businesses eliminate or repay their debts under the protection of the bankruptcy court. There are different types of bankruptcy, but most individuals file under Chapter 7 or Chapter 13.  

In Chapter 7 bankruptcy, most of your unsecured debts are discharged, meaning you don't have to pay them back. However, you might have to sell some of your assets to pay off creditors.  

Certain assets, such as your home and car, are exempt from liquidation, allowing you to retain essential items within specified value limits. Chapter 7 bankruptcy typically takes a few months to complete, providing a relatively swift path to debt relief. 

In Chapter 13 bankruptcy, you create a repayment plan to pay off your debts over three to five years. You get to keep your property, but it requires you to make monthly payments to a trustee who distributes the funds to your creditors.  

Chapter 13 bankruptcy can be beneficial for individuals who have a steady income but are struggling to manage their debt load.  

Types of Debt in Bankruptcy

Secured Debts 

Secured debts are tied to an asset, such as a mortgage or car loan. If you default on these loans, the lender can take the asset back. Filing for bankruptcy might allow you to retain it if you continue making payments. 

Unsecured Debts 

Unsecured debts, like credit card debt, medical bills, and personal loans, are not tied to any asset. These debts are typically discharged in Chapter 7 bankruptcy. 

Joint Debts 

Joint debts are loans or credit accounts held by you and your spouse together. Both of you are responsible for repaying them. If you file for bankruptcy, your spouse might still be liable for the full amount. 

Priority Debts 

Priority debts, such as child support, alimony, certain tax debts, and wages owed to employees, are considered more important under bankruptcy law and given special treatment. Unlike unsecured debts, priority debts cannot be discharged in bankruptcy, meaning they must be fully paid off either through the liquidation of assets in Chapter 7 or through the repayment plan in Chapter 13. 

Non-Dischargeable Debts 

Certain debts, such as most student loans, debts incurred through fraudulent activities, recent tax obligations, and personal injury debts resulting from driving under the influence, are generally not dischargeable in bankruptcy, meaning you will still be responsible for paying them even after your bankruptcy case is resolved. You are obliged to repay non-dischargeable debts even after successfully completing a bankruptcy process. 

Contingent and Unliquidated Debts 

Contingent debts depend on the occurrence of a specific event that might or might not happen, such as acting as a guarantor for someone else’s loan. Unliquidated debts are debts where the exact amount owed is not determined. These types of debts are assessed during the bankruptcy process, and their inclusion can affect both the proceedings and the outcome of the case. 

Impact on Your Spouse's Credit 

One of the biggest concerns people have about filing for bankruptcy is how it will affect their spouse's credit score. 

  • Separate credit scores: Your bankruptcy filing does not directly impact your spouse's credit score, as each of you has a separate credit report. However, in some situations, it can indirectly affect their credit. 

  • Joint accounts: If you have joint accounts with your spouse, your bankruptcy can negatively affect them. For example, if you stop making payments on a joint credit card, it will show up on both of your credit reports as a missed payment. 

  • Authorized user accounts: If your spouse is an authorized user on one of your accounts, your bankruptcy filing could impact their credit. You can avoid this by removing them as an authorized user before filing. 

  • Cosigned loans: If your spouse has cosigned any of your loans, your bankruptcy filing can significantly impact these accounts. Because a cosigner is equally responsible for the debt, the lender may pursue your spouse for the remaining balance if you file for bankruptcy. This can result in negative marks on both of your credit reports, affecting your spouse's credit score and their ability to obtain future loans. 

  • Community property states: In community property states, most debts incurred by either spouse during the marriage are considered joint debts. As a result, even if only one spouse files for bankruptcy, creditors may still pursue community property to settle individual debts. This puts jointly owned assets at risk, potentially leading to financial complications for your spouse. 

  • Future loan applications: While your spouse's credit score may not be directly affected by your bankruptcy, it could still influence future joint loan applications. Lenders may scrutinize the bankruptcy on your credit report and hesitate to approve joint loans or offer favorable terms. This could create challenges if you and your spouse have significant financial goals, such as purchasing a home or financing a large expense together. 

Property and Asset Considerations

If you and your spouse own property or assets jointly, here’s what you need to know before filing for bankruptcy: 

Jointly Owned Property 

In a Chapter 7 bankruptcy, the trustee can sell jointly owned property to pay off your debts. However, your spouse is entitled to their share of the proceeds. In Chapter 13 bankruptcy, you can keep the joint property if you comply with the repayment plan. 

Exempt vs. Non-Exempt Property 

Each state has its own list of exempt properties that you can keep even after filing for bankruptcy. Non-exempt property could be sold to pay off creditors.  

Tenancy by the Entirety 

In some states, including Tennessee, married couples can own property as "tenants by the entirety." This means the property is owned by the couple as a single entity and is protected from being sold in bankruptcy. 

Household Items and Personal Belongings 

When you file for bankruptcy, common household items and personal belongings like furniture, clothing, and appliances might be considered exempt property, meaning they are protected from being sold to pay off creditors.  

The specifics of what can be exempt vary from state to state. In Tennessee, for example, exemptions typically cover a wide array of necessary household items, ensuring that the bankruptcy process does not severely impact everyday living conditions. 

Retirement Accounts 

Retirement accounts, such as 401(k)s and IRAs, often receive special protection in bankruptcy filings. These accounts are typically considered exempt property, meaning creditors cannot typically claim those funds to settle your debts. This safeguards your long-term financial security from temporary financial setbacks.  

Laws in Tennessee

If you live in Tennessee, you need to understand the bankruptcy laws and exemptions that apply to you. 

Tennessee Exemptions 

Tennessee allows you to protect certain property from being sold in bankruptcy. Common exemptions include: 

  • Homestead exemption up to $5,000 for a single filer and $7,500 for a joint filer. 

  • Personal property exemption up to $10,000, including clothing, furniture, and appliances. 

  • Vehicle exemption up to $10,000. 

Impact of Tenancy by the Entirety 

In Tennessee, property owned as tenants by the entirety is generally protected in bankruptcy. This means that if only one spouse files for bankruptcy, the jointly owned property cannot be sold to pay off individual debts. 

Protecting Your Spouse's Financial Future

This is how you can protect your spouse's financial well-being from the long-term implications of bankruptcy: 

  • Open communication: Discuss your options to make informed decisions and reduce stress. 

  • Separate finances: Keep some finances, such as individual bank accounts and credit cards, separate to protect your spouse's assets and credit score.  

  • Build a financial plan: This might include budgeting, saving, and working with a financial advisor to rebuild your credit and financial stability. 

  • Safeguarding joint accounts: Before filing for bankruptcy, review all joint accounts, including bank accounts, credit cards, and loans. Consider removing your spouse's name from these accounts or closing them altogether. 

  • Consult a bankruptcy attorney: They can help you understand your options, guide you through the process, and advise on how to protect your spouse's interests. 

  • Credit counseling: Credit counseling services help you create a plan to manage your debts and avoid future financial difficulties. Some credit counseling agencies offer free or low-cost services. 

  • Financial advisors: They can help you and your spouse create a long-term financial plan and offer advice on budgeting, saving, and investing to help you rebuild your financial health. 

Consult a Bankruptcy Attorney in Kingsport, Tennessee

Steven C. Frazier, Attorney-at-Law, has been helping people deal with bankruptcy for over four decades. He understands firsthand the complications and emotional strain that financial difficulties and family legal matters can bring. His clients often find comfort in his extensive experience and deep empathy.  

In addition to his professional expertise, he has personally dealt with the challenges that families face, including divorce. His straightforward approach and strong ties to the area make him a relatable and trusted advisor in trying times. 

Call him today to schedule a consultation and put your financial troubles behind you.