Married in Bankruptcy: Do Joint Cases Have To Stay Joint?

30 Dec Married in Bankruptcy: Do Joint Cases Have To Stay Joint?

Married couples can file a “joint” bankruptcy under any chapter of the law in which an individual can also file. But what if the marriage doesn’t work out? Do they have to stay in their case together?

Virtually every court concludes they don’t. In such cases the court would allow the two parties to the case to “sever” or “deconsolidate” the case into two separate cases (with an additional fee — set by the Administrative Office of the U.S. Courts — in order cover the difference between the original fee paid and what would be charged for two separate cases). And the spouses — or former spouses, as the case may be — to proceed as their individual needs dictate.

Oddly enough, this is taken for granted in most every part of the country. Indeed, to the best of my knowledge after an informal national poll, my Missouri district is the only one refusing to allow the division of joint cases. Until this year, apparently no one had felt the need to even publish a decision. Oklahoma Bankruptcy Judge Terrence Michael had the unusual pleasure of writing on a clean slate, despite dealing with a topic which has been around for decades. In In re Shjeflo, 383 B.R. 192 (Bankr.N.D.Okla. 2008), the wife wanted to sever her part of a Chapter 13 case from her soon-to-be ex-husband and convert her case to Chapter 7. The court had an established procedure in place (which appears to be based on the procedures set up by the U.S. Court system) but the Chapter 13 Trustee objected.

Judge Michael, in a careful opinion overruling the objection, pointed out that all joint cases are only joined for administrative convenience. There is, legally speaking, a separate estate for each debtor. It may be managed together for convenience — and in Chapter 13 there is normally only one payment plan, one trustee, one pool of money distributed and so forth. But those are for practical reasons, not legal ones. There is a separate proceeding to actually consolidate the two cases into a truly unitary proceeding — and the presumption is against doing so.

Any other alternative has extremely harsh results for the consumers — seemingly in order to avoid administrative inconvenience for the court system. This situation normally arises in those cases with long terms, Chapter 13 typically although it is possible now with the revised Chapter 11 as well. If you have filed a case with a spouse you no longer can work with, if the court won’t let you sever the two cases, then you have a potentially painful set of options. You can continue to try to make the repayment work. Of course if your former spouse is getting all the benefits (i.e. keeping property paid through the case) while you are paying for it, that may seem unfair. Or they are no longer be helping to pay and you can’t afford the payments, that too would be harsh or disastrous.

Of course, you could elect to be dismissed out of the case since this is typically granted rapidly in a Chapter 13. That of course leaves you open to creditors but you could then file a new Chapter 7, if that was your original desire.

If the only question was about filing fees and extra paperwork, that would be no problem. But of course that’s a minor concern. In reality, the person who does this loses a variety of rights and opportunities that existed if they’d simply filed an individual Chapter 13 and then converted it to Chapter 7. For starters, the law provides a required “gap” between one completed bankruptcy filing and another one. That is currently eight years between Chapter 7 filings; four years between a Chapter 7 and a follow-up Chapter 13; and so on. This period is measured from date-of-filing to date-of-filing — so if you dismiss a case and file again, the clock starts running again. But a conversion is measured from the original filing date — so if you spent three years in Chapter 13 and then converted to Chapter 7, you will have “covered” three of your eight year time-out already. This may not seem like a big deal now — you are getting rid of your debt problem and hope to never have another. But Congress has decreed you can file again if the need arises and a court forcing you to start over is also legislating the time limit beyond what Congress thought was necessary.

It can still matter as well in determining something so fundamental as what law applies. If your case was filed under pre-BAPCPA law, then the converted case will be governed by the older more debtor-friendly law. If you have to dismiss in order to proceed under another chapter, then BAPCPA will apply. This can limit the range of things that are discharged, the exemptions that protect your property, how that property is valued, and so on. Indeed, even if the same law (BAPCPA, for example) applies, you may have accrued benefits in Chapter 13 which you would lose by being forced to drop out and start over. (This could be particularly true in states that recognize entirety protections for joint property.)

It can also damage your ability to rebuild your credit in the future. The Fair Credit Reporting Act allows a bankruptcy to be reported by credit reporting agencies for ten years. When does that time start running? From the date the case is filed. If you were in a Chapter 13 for four years, dismissed out of it, and refiled in Chapter 7, what will show up? Two bankruptcies will be reported for six more years and the last one for another four. If the court allowed the severance and conversion of the original case, only one bankruptcy would be reported for six more years. Even if none of the other legal problems would hurt you, this by itself amounts to six-to-ten years of punishment for (basically) having a flawed or failed marriage — after, in many cases, trying to start over with less household income anyway.

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I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively, although I have represented bankruptcy trustees as well as creditors. For 2017-2019 I served on the American Bankruptcy Institute's Commission on Consumer Bankruptcy. Our Report recommended numerous changes to improve bankruptcy law to make it serve everyone in the process more effectively. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website:
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