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Will My Bankruptcy Affect My New Spouse?

JRB Law PLLC April 9, 2024

Unhappy couples in kitchen due to financial crisisBankruptcy is often perceived as a financial failure. However, it is actually an effective legal tool designed to provide relief for those struggling with overwhelming debt. It's a strategic step towards regaining financial stability, not a reflection of personal defeat.

For those entering into a new marriage, the question of whether bankruptcy will impact your new spouse is a valid concern. Unfortunately, there is no one-size-fits-all answer, as the impact of your bankruptcy filing on your spouse will depend on several factors, including the type of bankruptcy you filed and the specific laws of your state.  

If you are curious about filing for bankruptcy before marrying or want to know more about how bankruptcy will impact your spouse, reach out to an experienced bankruptcy attorney from The Law Offices of John R. Bailey. An experienced bankruptcy attorney can help you understand your state's specific requirements and make informed decisions when filing. 

Understanding Bankruptcy

Bankruptcy should not be seen merely as an end but as a chance to work toward achieving financial security. It is a legal process that allows individuals with overwhelming or unmanageable debts to either eliminate their debts or rearrange the terms of their payments. This process is designed to provide a fresh start by offering them an opportunity to reset their finances. 

There are two primary bankruptcy chapters that are suitable for individuals, and each is designed to accommodate different financial situations and objectives. Through bankruptcy, debtors can halt foreclosure processes, prevent utility shutoffs, and stop most debt collections, providing a pathway to not just financial recovery, but to a new beginning: 

  • Chapter 7 Bankruptcy - Often referred to as "liquidation" bankruptcy, Chapter 7 involves the sale of certain assets to pay off debts. However, not all your assets will be sold. There are exemptions that protect specific assets, like a primary residence or car, up to a certain value. This type of bankruptcy is designed for those with limited income who cannot afford to pay back their debts. It can provide a relatively quick resolution, typically concluding within three to six months. 

  • Chapter 13 Bankruptcy - Known as a "wage earner's plan," this type allows individuals with a regular income to develop a plan to repay all or part of their debts. Under Chapter 13, debtors propose a structured repayment plan to make installments to creditors over three to five years. This option can be particularly appealing for those seeking to avoid foreclosure on their home, as it offers a chance to catch up on missed mortgage payments over time. 

How Can Filing for Bankruptcy Impact Your Spouse?

If you enter a new marriage with a bankruptcy filing, the impact on your new spouse hinges on the specifics of your financial situation and the type of bankruptcy you filed. Generally, your spouse's credit score and assets that are not jointly held will not be directly affected by your bankruptcy. However, there are some areas where your spouse's assets or credit may be affected: 

  • Joint Debts: If any of your debts are co-owned or if you and your spouse incur joint debts post-marriage, your spouse could be held responsible for these debts, despite the bankruptcy filing. This is particularly relevant in community property states where most of the debts incurred by one spouse during the marriage are owned by both spouses. 

  • Shared Assets: If you file for Chapter 7 bankruptcy, any joint assets owned by both you and your spouse could potentially be liquidated to pay off your debts. However, this depends on exemption laws and the specifics of your case. With Chapter 13 bankruptcy, your joint assets are less likely to be affected due to your repayment plan. 

  • Credit Impact: While your bankruptcy filing should not directly impact your spouse's credit score, joint applications for credit might be affected. Lenders may consider the bankruptcy on a joint application, which may affect the terms or your eligibility for loans. 

  • Future Financial Planning: Bankruptcy can influence future financial decisions, including purchasing a home or car. You and your spouse should consult with a financial advisor or a bankruptcy attorney to better understand the potential implications of filing for bankruptcy. 

Should I File for Bankruptcy as an Individual or as a Couple?

Deciding whether to file for bankruptcy as an individual or as a couple is a significant decision that can have lasting implications on your financial well-being. It's crucial to weigh the pros and cons of each option in light of your specific financial situation.  

Filing as an individual may be beneficial if most of the debts are in one spouse's name, this can protect the non-filing spouse's credit score and potentially safeguard their separate assets. On the other hand, filing jointly could be a strategic move for couples who have accumulated a substantial amount of joint debt, as it may provide a more comprehensive solution to their financial difficulties and allow them to discharge or reorganize their combined debts effectively.  

Each case is unique, and the best course of action depends on various factors, including the types of debts owed, the laws of the state in which you reside, and the extent of your and your spouse's financial entanglement. Consulting with a knowledgeable bankruptcy attorney is essential to understand your options fully and make an informed decision that aligns with your goals for financial recovery and future stability. 

Bankruptcy Laws in Michigan

Like in many states, Michigan follows federal bankruptcy laws. However, state-specific laws and exemptions also play a crucial role in the proceedings. Michigan allows you to choose between federal and state-specific exemptions, providing some flexibility based on your circumstances. Some of the primary exemptions include: 

  • Homestead exemptions, which protect equity in your home 

  • Personal property exemptions, which cover items such as clothing, household goods, and a vehicle up to a certain value 

  • Wildcard exemptions, which can be applied to any property of the filer's choosing. Retirement savings and pensions are also generally protected. 

It's important to note that Michigan's exemptions are particularly relevant in a Chapter 7 bankruptcy, where non-exempt assets can be sold to pay creditors. In a Chapter 13 bankruptcy, Michigan's exemptions influence how much you will need to pay your unsecured creditors through your repayment plan. 

Additionally, Michigan is an equitable property state, which means that marital assets are typically divided equally in the event of a divorce. However, when it comes to debts, Michigan adheres to the principle of 'equitable distribution', which allows for a fair—or equitable—division of liabilities, usually taking into account individual financial circumstances.  

Factors To Consider Before Filing Bankruptcy

Filing for bankruptcy is a significant decision that can have long-lasting effects on your financial and personal life. Before you file, it's important to consider the various factors that could impact both you and your spouse: 

  • Types of Debts: The type of debt you hold, whether it's secured, unsecured, joint, or individual, plays a significant role in the decision to file for bankruptcy. However, not all debts can be discharged through bankruptcy, such as child support, student loans, and certain tax debts. 

  • Your Current and Future Financial Goals: Your decision should align with your immediate financial needs as well as your long-term plans. Filing for bankruptcy can affect your ability to secure financing for a home, car, or other life necessities.  

  • Credit Score: While bankruptcy can provide relief from overwhelming debt, it will have a significant impact on your credit score and should be carefully considered before filing. 

  • Potential for Future Joint Debts: If you and your spouse plan to take out joint loans or credit in the future, it's essential to understand how bankruptcy may affect your eligibility and terms. 

Seek Out Knowledgeable Legal Help   

Depending on the type of debt and your filing status, filing for bankruptcy can potentially affect not only your finances but also those of your spouse. Therefore, you should seek out experienced legal advice before making any decisions. A knowledgeable bankruptcy attorney from The Law Offices of John R. Bailey, located in Ypsilanti, Michigan, can help you understand your state's laws, explore your options, and make informed decisions that align with your goals for financial stability.