A Marital Compromise: Filing Bankruptcy without your Spouse

Author: Dustin Wetton

Filing bankruptcy is a tremendously difficult decision to make, especially if the consequences of that decision may disrupt marital peace. To keep things harmonious on the home-front, an important option to consider is whether spouses should file together or separately.

A common misconception is that all debts of a marriage are each spouse’s responsibility, called “community debts.” While there are instances where community debts do exist, many debts are not community debts and therefore are not the liability of both spouses. Generally marriage alone does not make community debts, it is often through contracts and agreements between the lenders and the debtors. Commonly, only persons who signed for a loan or credit are liable for such debt. Thus, while finances and situations may be leading your family towards considering bankruptcy, it is very important to analyze each and every debt to see if it is in the best interest of your family to have only one spouse file bankruptcy.

A bankruptcy filing by one spouse is allowed under the Bankruptcy Code, and this filing does not bring the other spouse into the bankruptcy. While this may sound great, I must reiterate the necessity to analyze all of the debts to ensure that most, if not all, of the debt is that of the filing spouse, i.e. “separate debt.” I say this because if it is community debt, the protections of filing bankruptcy, called the automatic stay, will not be allocated to the non-filing spouse. Therefore, if there is community debt, and only one spouse is filing bankruptcy, then the non-filing spouse will be 100% liable for that debt themselves and the creditors will come after them hard as they would be aware of the other spouse filing bankruptcy. Thus, it is important to make sure what debt is what and how much at risk the other spouse may be.

Another important consideration is joint property. Under California law, property purchased during marriage is community property. Therefore, in bankruptcy, the bankruptcy estate will consist of rights to the community property. So even if only one spouse is filing, both halves of the community property rights enter the estate and all of it is both protected if it can be exempted, or is available for paying creditors. Therefore, it is important to analyze what properties may be at risk and to ensure that there are allowable exemptions or other protections available.

In sum, even if you are married, only one of you can file bankruptcy without affecting the others credit record, however, to do this without causing turmoil at home, be sure to have your debts and properties properly analyzed.

If you have questions regarding this blog or any comments, email us at blog@lauruslaw.com

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Income Taxes and Bankruptcy

Author: Dustin Wetton

Ben Franklin once said that “the only things certain in life are death and taxes.” This quote can have many innuendos, one of which is that there is no way of getting out of paying for your taxes. However, during Mr. Franklin’s life, the United States had not yet setup a bankruptcy court or bankruptcy code. Thus, he was unaware of the ability to discharge federal and state income taxes through the bankruptcy process.

The bankruptcy code was initiated to help ease the burden of over-encompassing debt on debtors and to help create and protect the flow of credit. While most creditors are often credit-card companies, health industries, and lawsuits, in many cases, the federal and state governments are also creditors. In these situations, for whatever reason, the debtor owes their respected governments taxes, and thus is established a creditor-debtor relationship between the taxpayer and the government.

This situation is very common in bankruptcy. Yet because the creditor is the government, they have a very high priority of distribution and a more difficult burden of discharging their debt than most unsecured debtors. Thus, if you owe money on taxes from previous years, you can have your debt discharged, that is “wiped clean”, however the following six steps must be fulfilled in order to do so:

1)The due date of filing the return is at least 3 years ago
2)The tax return was filed at least 2 years ago
3)A tax assessment occurred at least 240 days ago
4)The returns are not fraudulent
5)The debtor is not guilty of tax evasion, and
6)The debtor must prove the past four years of filings had been filed.

These six steps must be followed to a tee in order to get the past years taxes discharged. If there are problems in qualifying for any of the steps, an attorney, the trustee, and the IRS are all very helpful in figuring if the debts can be discharged or not. Also, it may be a good idea to get a tax transcript from the IRS and the State for the tax years that you are going to try to discharge to make sure that your numbers are correct.

BP's Bankruptcy

author: Dustin Wetton

Ever since the April 20, 2010 blasts that sent gallons of oil leaking into the Gulf, the BP company has been heavily under legal fire. Lawsuits for damages, ranging from environmental to loss of life, have really hurt the company. Yet according to a recent article at BreakingLegalNews, a lot more harm will have to come BP’s way for any possible consideration of bankruptcy to be discussed. According to the article, BP still has many resources and options available to itself before it has to consider bankruptcy. While it has suffered in the stock market, has many lawsuits pending against it, has been on the downside of almost every judgment declared by the court, and has many creditors that are worried about being paid, BP still does not have to file bankruptcy. Thus, for our blog’s purpose, even when a company such as BP, under the worst environmental circumstance in many years, can believe that it does not have to file for bankruptcy, the question is when should you? When should a company or an individual decide to file for bankruptcy?

Luckily for individuals, the answer is easier than for businesses. For a chapter 7 bankruptcy to be filed, an individual must pass what is known as a “means-test.” Under the current BAPCA standards, an individual can only file for chapter 7 bankruptcy if they can prove to the federal court that their means cannot afford their end. If they however show that they can afford their bills and if they just rearranged their finances, they could get out of debt, than the court will not allow for a bankruptcy.

Thus, for individuals, a good method to see when you should file bankruptcy is to do a similar test. If you take all the debts you owe and compare then to all the income you make, ask yourself if it is possible to get out of debt without filing bankruptcy. If you know that you cannot make your monthly living payments, your car payments, your student loans, your child support, and your credit card bills without sacrificing your food or clothing, than you probably should consider bankruptcy. But, if you are sitting in similar shoes to that of BP, and you have a lot of debt, but you also have a lot of options and can refocus your finances, than you probably should consider doing that first before you file for bankruptcy.

Therefore, to answer my own question, when should you file bankruptcy…you should file it when it is rational to do so. That is, the decision to file for bankruptcy should be responsible, logical, and make the best sense. That goes for both individuals and for businesses. If you are considering bankruptcy, reflect on your financial situation and decide if it’s the best decision for you and your family.

If you have any questions or comments on the blog, email us at: blog@lauruslaw.com.