Whether you file bankruptcy with your spouse affects the protection from creditors each of you gets, also whether you file Chapter 7 or 13.
We are in a midst of a series of blog posts about the consequences of filing bankruptcy by yourself vs. with your spouse. One of the important considerations in this decision is whether you both get protection from your creditors’ collection activities.
Does Bankruptcy Only Protect the Spouse Filing Bankruptcy?
It makes sense that if you want bankruptcy protection from your creditors, you need to file bankruptcy to get it. In other words, if you want creditors to not be able to pursue both spouses, both need to join in the bankruptcy case.
Sounds sensible, but isn’t necessarily true.
It IS True in Chapter 7
If you file a Chapter 7 “straight bankruptcy” case by yourself and without your spouse, as for any debts owed by both you and your spouse the creditor would be able to continue pursuing your spouse to pay that debt. Your Chapter 7 filing puts an immediate halt to just about all collections actions by just about all creditors against you and your assets. But your filing has no effect on joint creditors’ actions against your spouse and his or her assets
That’s because the “automatic stay,” the federal law which stops creditors from collecting debts immediately upon the filing of a Chapter 7 bankruptcy only protects the person who files. The section of the federal Bankruptcy Code which provides for the “automatic stay” says that it stops “any act to collect… a claim against the debtor.” And a “debtor” is a person who has filed a bankruptcy case.
Maybe even more importantly, the “discharge” of debts—their legal write-off—that you get about 3 or 4 months after the filing of your Chapter 7 case, does not “discharge” any liability that your spouse may have. On joint debts the creditors would usually have the legal right to make him or her pay the full balance owed.
So if your spouse does not join in your bankruptcy case (and doesn’t file his or her own separate case), nothing stops this spouse’s creditors from pursuing the debts owed by him or her. The “automatic stay” provides no protection while your case is active. And your discharge of the debts does not discharge his or her liability on any debts into the future. Those debts include both ones that are jointly owed as well as ones he or she is liable on alone.
This lack of both immediate and long-term protection is the reason that much of the time married couples end up filing joint bankruptcies. Besides any individual debts each may have, most spouses have joint debts for which both spouses need immediate and long-term protection.
Chapter 13 Can Protect a Non-Filing Spouse Immediately and Long-Term
In fact bankruptcy does have the ability to protect a co-obligor, including a spouse, but ONLY under a Chapter 13 “adjustment of debts.” The extraordinary “co-debtor stay” of Chapter 13 extends protection to “co-debtors” immediately upon the filing of the case. A co-debtor is “any individual that is liable on [a consumer] debt with the debtor.” That includes a jointly obligated spouse who does not join in the filing of the other spouse’s bankruptcy case.
This means that under the right circumstances one spouse can file a Chapter 13 case without the other spouse needing to do so.
But this protection comes with conditions.
First, a creditor on a joint debt can object to the “co-debtor stay.” If so, the bankruptcy court WILL still continue protecting the non-filing spouse but ONLY if the filing spouse is paying that co-signed debt in full through the Chapter 13 payment plan. So the filing spouse can continue protecting the non-filing spouse by making sure that debt will be paid. Note that Chapter 13 debtors are generally allowed to favor such consumer joint debts over other non-joint debts in order to protect co-debtor. So this is a way for only one spouse to file bankruptcy and still protect the other spouse from a joint creditor or two.
Second, in order to defeat a joint creditor’s objection to the co-debtor stay the filing spouse must be the one who received the benefit of the co-signed debt. If instead the non-filing spouse “received the consideration for the claim held by such creditor” (Section 1301(c)(1)), then the court would give the objecting creditor the right to pursue the non-filing spouse.
And third, the “co-debtor stay” only provides protection to the non-filing spouse on JOINT debts. Debts that are ONLY owed by the non–filing spouse are not affected by the other spouse’s Chapter 13 filing. The “co-debtor stay” does not apply to debts for which the filing spouse is not liable. So creditors on debts solely owed by the non-filing spouse must continue to be paid or will result in collection action against that spouse.
But if these conditions are met, the co-signed debt can be paid off during the filing spouse’s 3-to-5-year Chapter 13 plan while both spouses are protected from collections by that creditor—the filing spouse protected by the “automatic stay” and the non-filing spouse by the “co-debtor stay.” Then by the end of the case the debt would be paid in full, and that creditor would be no longer able to cause any further problems for either spouse.