If I’m Married, How Will A Bankruptcy Affect My Spouse?

If one partner in a marriage has incurred significant debt and must file bankruptcy, and a non-filing spouse is not legally responsible for any of the debt, the non-filing spouse can be affected in certain respects. In Chapter 7 and Chapter 13 cases, the non-filing debtor spouse’s income is factored into the means test in terms of qualifying for chapter 7 and is included in the calculation of current monthly income under chapter 13 to determine the projected plan payment. Any assets that an individual spouse owns that are not jointly owned are not property of the bankruptcy estate under 11 USC 541. The most common scenario is when an individual jointly owns a home with a spouse. When one spouse files bankruptcy and the other spouse does not, presumptively the non-filing spouse has a one-half equity interest in the marital home. Assuming that the debtors have significant equity over the real estate exemption, the non-debtor spouse can be affected in bankruptcy because a trustee may seek to sell the home since they have a right to seek court authority for a sale where the excess equity after considering applicable exemptions might fund a distribution to creditors.

As an alternative, if there is significant nonexempt equity in a jointly owned property, the debtors should strongly consider filing a chapter 13 case wherein they would pay the value of the equity as a distribution to creditors under the Best Interest of Creditors Test over a three to five year period. The projected amount of equity is based upon a hypothetical sale of the property crediting the secured debt outstanding against the property, costs of sale and the debtor’s exemption.

Will Filing For A Bankruptcy Hurt My Spouse’s Credit?

If a husband and wife or domestic partner do not own any joint assets and do not have any joint debt, the bankruptcy should not have any affect the non-filing spouse’s credit. However, that situation is less common than a situation where there’s at least one asset, be it a car, a home, or some personal property jointly owned. It is common that a credit reporting agency when one spouse files bankruptcy on a joint debt will report that event because the asset itself, the collateral of the creditor, and the lender’s ability to pursue that collateral is affected by the actual filing of the bankruptcy case. In most circumstances, there is not a significant adverse effect on a spouse’s credit, especially in a situation where the home mortgage is not delinquent at the time of filing.

If I File For Bankruptcy, Could Creditors Go After My Spouse Instead?

An individual who has signed a contract or agreement is the only party legally responsible for the financial circumstances caused by a default on that agreement. Solely under marriage or civil union, the other party is not accountable. There are unique circumstances involving medical debt where a creditor can sue one spouse for a significant medical debt under the common law of many states, including New Jersey. The cases are not always consistent, but it is a situation that arises. Creditors or a Trustee can pursue a spouse or civil union partner where that spouse or individual partner has been a recipient of transfers of assets from the debtor who is the filing spouse. Usually, if there have not been any transfers between the spouses and one spouse does not transfer their salary or other assets into the non-filing spouse’s bank account, a spouse is not pursued by either a creditor or a trustee unless that creditor relies upon a contract or written agreement that both parties are liable.

How Could Filing A Personal Bankruptcy In New Jersey Affect Our Business?

An individual who files a personal bankruptcy must disclose all assets owned, either legally or in which that person holds an equitable interest. All assets are considered property of the bankruptcy estate unless specifically excluded under 11 U.S.C. 541 of the Bankruptcy Code. In business cases, individuals may own a membership interest in an LLC or a partnership if they are the business owner or were entrepreneurs. They could also own a stock interest in a corporation or have a limited or general partnership interest in a company. The interest itself in a personal bankruptcy case must be disclosed and valued on the Petition even though the business itself is not filing. If the individual is the debtor, then a partnership or their membership interest in an entity must be disclosed. In a chapter 7 case, a trustee will evaluate the estimated market value of that interest. Depending upon the liquidation value and solvency of the company, a Trustee could attempt to sell the estate’s interest or approach the debtor to negotiate a reasonable buy out.

If Our Circumstances Have Changed, Could We Make Changes To A Chapter 13 Plan In New Jersey?

11 U.S.C .1329 of the Bankruptcy Code allows debtors to file a modified plan based upon changed circumstances. The modified plan can propose different treatment to creditors but must also comply with 11 USC 1325, which are the conformation standards for a chapter 13 plan. During the pendency of a confirmed Chapter 13 Plan income and expenses can change drastically and the solution is to propose a modified plan. Although a new Plan might pay less to creditors, it must still be feasible and comply with all aspects of the Bankruptcy Code. In the COVID environment a chapter 13 plan confirmed before March 26 of 2020 can be extended for two years if the debtor can show that they are experiencing or have experienced material financial hardships due directly or indirectly to the COVID-19 pandemic. There are legitimate bases for modifying a plan based upon changed circumstances, but a modified plan must also comply with the code and be feasible i.e. the Debtor must show proof of the ability to make payments under the Plan as modified. In a recent case in Re: Winnegrad, a bankruptcy judge denied the debtor’s proposed modification of a confirmed chapter 13 plan under 11 USC 1329(d) because the debtor could not prove the basic confirmation requirements of 11 USC 1325 requiring that the plan, as modified, must also be feasible. In the Winnegrad case, the debtor’s modified plan proposed a two-year moratorium on making any payments to creditors., The debtor’s provided no evidence of their ability to resume plan payments in two years or address the significant arrearage already owed to their mortgage lender. Thus, confirmation of the debtor’s proposed modified plan was denied.

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