If you’re married and considering bankruptcy, you must decide whether you want to file a joint or individual bankruptcy. Before you can make the right decision, you’ll need to understand the advantages of joint and individual bankruptcy.
If you and your spouse are trying to decide between an individual bankruptcy and a joint bankruptcy, you’ll need to consider the amount of indebtedness you both have. In community property states, all debts incurred in the marriage are the responsibility of both spouses, so in that case you are both equally indebted with maybe a few exceptions (i.e. debts acquired before the marriage). If you’re not living in a community property state, then you need to look at how much debt each of your owe and which assets are vulnerable to creditors. For example, if one spouse owes $20,000 while the other owes $5,000, there is an obvious debt imbalance. In that case, it may not be beneficial to do a joint bankruptcy, especially if the spouse owing $5,000 is current on their bills and owns property that cannot be seized by the other spouse’s creditors.
Even if both spouses are equally indebted or live in a community property state, filing an individual bankruptcy may be a better option if one of the spouses has filed bankruptcy in the past 6 – 8 years. Since the bankruptcy system has a limit how often you can file bankruptcy, an individual bankruptcy filing could come in handy.
When weighing the pros and cons of an individual bankruptcy filing versus a joint filing, you must consider how a joint filing will impact the Means Test. In a nutshell, the Means Test measures a debtor’s financial ability to pay their debts based on how much disposable income they have. The Means Test will look at the household’s income, both spouses in the case of a joint bankruptcy, and examine their allowable expenses. If, after deducting allowable expenses, it’s determined that you and your spouse’s combined income allows you to repay your creditors, you may not be allowed to file Chapter 7 bankruptcy. If that’s the case, you’ll have to repay your creditors in a Chapter 13 bankruptcy. This is the dilemma of many married couples—sometimes filing a joint bankruptcy will cause you to fail the Means Test because your combined income is just too high. However, every situation is different. For example, a joint bankruptcy may still be beneficial if both spouses are low or moderate income or if one spouse isn’t working.
In most cases, filing a joint bankruptcy is cheaper than filing two individual bankruptcies. Because joint filers only need to file one petition and one set of documents, they can save significantly on attorney fees and the time required for the bankruptcy case.
When considering a joint bankruptcy versus an individual bankruptcy, you’ll need to look at your individual circumstances and the laws of your state.