CAN a spouse file for bankruptcy while the other does not? For instance, husband’s gross income is $3,000 monthly. Wife’s income is $8,000 monthly. Husband has $100,000 of credit card debt. Wife has $50,000 of credit card debt. Husband wants to file bankruptcy, either a Chapter 7 to discharge all of his $100,000 of credit card debt, or a Chapter 13 where he proposes to pay $200 a month or 18 percent of his credit card debt. Wife does not want to file any bankruptcy. Can husband file a Chapter 7 or Chapter 13 petition by himself? YES, he can, assuming he is otherwise eligible for bankruptcy relief. Is wife’s credit score affected by husband’s bankruptcy? NO, because wife did not file for bankruptcy and her social security number is not included in husband’s bankruptcy petition.
Having said the foregoing, the analysis of husband’s qualification for bankruptcy becomes complicated because even though wife will not be filing bankruptcy together with husband, her income is part of the factors that come into play in the legal analysis of husband’s bankruptcy eligibility. Lawyers may look at the same case differently depending on how they analyze the case. One lawyer may assess the case as a Chapter 7, while another lawyer may assess the case as a Chapter 7, using exactly the same set of facts. The truth is that even though spouses are married to each other, one spouse can be flat broke, while the other spouse is not. In fact, I have represented several couples where one spouse has filed a Chapter 7, while the other spouse has filed a Chapter 13 concurrently! Unfortunately, even if only one spouse is plagued by a large amount of credit card debt, the debt load becomes a burden for the entire household. Thus, it makes legal sense for the bankrupt spouse to file his or her own bankruptcy.
Presentation of the bankruptcy must be properly pleaded to the court where the non filing spouse has good income. Indeed, even if the presentation is correct, the bankruptcy trustee and the US Trustee may raise issues that must be effectively responded to for the case to succeed. In Re Kulakowski vs. US Trustee is an example of a case that went awry for debtor. In this case, Susan Kulakowski, and her husband were married for 21 years, shared a joint checking account, filed joint taxes returns, jointly owned their home, and pooled their income and expenses. Hence, they were a single financial unit. The debtor had no income. Her husband’s net income exceeded the household expenses by $1,100 monthly. For instance, husband’s net income was $5,000 vs. household expenses of $3,900. Therefore, even if debtor’s income was zero, their household income was positive $1,100 monthly. Another way of saying this is that debtor qualified for a Chapter 13 with a plan payment of $1,100 which will pay about $66,000 of her unsecured debt. Debtor actually had $136,470 of unsecured debt. Applying the math, debtor could pay 48 percent of her unsecured debt over 60 months in a Chapter 13.
However, debtor filed for Chapter 7 relief herself, seeking to discharge $136,470 for a fresh start. What aggravated the situation was that the debt was incurred for the benefit of the household and her non filing husband. In other words, debtor did not incur the $136,470 going around the world having an affair with a third party lover. The bankruptcy court used the totality of circumstances test to dismiss Mrs. Kulakowski’s Chapter 7 petition for abuse under Section 707 of the bankruptcy code.
Debtor appealed to the 11th Circuit Court of Appeals arguing that Section 707(b)(3) makes no reference to “current monthly income,” which figures prominently in Section 707(b)(2)’s Means Test.
The 11th Circuit found that equity favored considering the husband’s income under the facts of the case. “Although we sympathize with Mrs. Kulakowski’s perception that the bankruptcy court paternalistically penalized her for having a wealthy husband, we also recognize the bankruptcy court’s overriding mandate to effectuate fairness and justice in applying the bankruptcy code.”
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.