Learning About Spouse Bankruptcy
Do not panic when facing spouse bankruptcy
Do not panic when facing spouse bankruptcy. Of course, we don't mean to say here that the fact your spouse declares insolvency is not a serious matter. We're just saying don't be alarmed.
Inheriting the debt of the insolvent spouse and being made suddenly responsible for them is not supported by law. Except for certain situations.
One thing you must never forget is that if you are not part of a debtor-creditor agreement, then you are not part of it. The obligation to pay any debt only arises between those involved in that agreement.
This means that the fact of marriage does not immediately operate to tie the spouse of the debtor to that debt. As far as the spouse is concerned, he/she is a stranger to the agreement, and thus, not responsible to pay the debt.
There are, however, instances where the spouse can be validly made to pay for those debts. But that is easy to explain. The reason why the spouse is made to take on the burden of the insolvent debtor is because the former was also part of the agreement.
In other words, the spouse also contracted to pay the debt together with the now insolvent debtor-spouse. That makes that spouse a co-debtor.
This is how that happens, when the co-debtor-spouse and the insolvent-spouse agree with the creditor to pay the debt together, then it becomes either a joint or a solidary obligation, depending on the agreement.
Under a joint obligation, an individual shares the burden of paying for the debts. However, he is responsible only to pay for his part of the debt and not all of it. If there's two of them, then it's a 50-50 split.
A solidary obligation is different. If the filing spouse cannot pay or fails to complete payment, then the non-filing spouse can be made to pay for everything or the balance. Whichever is the case. That is because in a solidary obligation, each creditor can be responsible for the whole amount.
What makes spouse bankruptcy special is that there is a privilege given to husbands and wives in that they can file for bankruptcy together. This is about the only time this can be allowed.
There are advantages and disadvantages to a joint filing for chapter 13 or 7 bankruptcy.
For example, if husband and wife are co-debtors because they have a joint debt, and only the husband files for a chapter 7 protection and he obtains a discharge from his debts, the creditor would still be free to call on the wife and collect on whatever remained of the debt.
Filing jointly for bankruptcy and obtaining a discharge will prevent creditors from pursuing either of them for the debt.
There is also the case for unsecured debts under chapter 13. These are debts not secured by property.
Under chapter 13 bankruptcy, if a co-debtor spouse files for bankruptcy alone, the "automatic stay" can apply to him and protects him from further collection activities by his creditors.
In addition, the "co-debtor stay" also comes into effect. By virtue of this, creditors are barred from collection activities targeting the non-filing spouse.
The rule on secured debts is that they should be satisfied completely. That means that these debts should be satisfied equally. There is no 50% here and 100% for the other. Failing to pay these will allow the creditors to go to court to ask for permission to collect from the spouse who did not file for bankruptcy.
This is what makes spouse bankruptcy stand out from the other forms of bankruptcy.
Speaking to a Schaumburg attorney can help make things clearer to you, especially when you are considering filing a joint or individual bankruptcy under chapter 13 or 7.
by: David Chang
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