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Articles

Bankruptcy and the Non-Filing Spouse.

August 9, 2006

The Bankruptcy Reform and Abuse Prevention Act of 2005 drastically changes the way American families can file for bankruptcy protection. In many cases, only one spouse has accrued the lion share of consumer debt and needs bankruptcy protection. Under the old law, this was not a problem. The spouse in need of protection simply submitted a bankruptcy petition for consideration using only his or her financial information. The non-filing spouse was only affected if joint debt existed.

Things have changed. Under the new law, total household income is considered when determining what chapter of bankruptcy an individual qualifies for. If you and your spouse make over the median income or don’t have enough justifiable expenses to eat up your combined budget, you must file a Chapter 13 bankruptcy. This involves a three- to five-year repayment plan. Gone are the days when, despite a low or no personal income, you can qualify for the relief of a 90-day Chapter 7 if your spouse has a high income.

The effect of the new law is to force non-filing spouses with high income to subsidize the filing spouse’s Chapter 13 repayment plan. The non-filing spouse may not have helped accumulate any of the debt, but Congress has made it clear that he or she will have a major role repaying it. Needless to say, this quirk of Congressional intent is creating marital strife in many households.

All is not lost. Competent legal counsel may still be able to help families find ways to fit within the boundaries of the new law. But don’t wait. Emergency filings should be avoided at all costs, because they take many important options off the table. The most important thing families can do, when only one spouse needs to file, is recognize the need for a bankruptcy early and start planning.