One basic principle of Bankruptcy is that there is usually no “marital penalty” and individuals are still able to file for Chapter 7 or Chapter 13 based on their own financial circumstances and not the separate finances of their spouse. In fact, even in a joint Bankruptcy case filed by spouses, there are still technically two separate Bankruptcy “estates” created. It is true that the Means Test and Chapter 13 budgets do consider the contributions of non-filing spouses to reflect the reality that the spouse will pay part of the household expenses, but Bankruptcy law does not make spouses legally responsible for the debts of the other spouse. It is simply not fair to the non-filing spouse. However, a recent court opinion highlights the fact that there are some exceptions to the general rule for unusual cases.
In the case, the couple had been married for over 20 years and, like many couples, had always pooled their income and expenses, had joint accounts and filed joint tax returns. The court viewed them as acting as a single “financial unit.” During the relevant time, the wife was unemployed and the couple relied on the non-filing husband’s sole income, which was more than enough to pay their monthly household expenses. Due to credit card debt, the wife filed a Chapter 7 case. Because she had no income, and only the Husband’s contributions to the household expenses were counted in the Means Test, she qualified for Chapter 7. The fact that her husband may have had excess income from his job did not disqualify her from Chapter 7. However – and this is the key detail – a review of her credit card charges indicated that many of the charges were for the benefit of the household and some were even for the sole benefit of the husband. Thus, although the husband was not legally liable for the wife’s debts, it was undisputed that he received a direct benefit from the credit card charges. Because of this, the U.S. Trustee sought dismissal of the wife’s Chapter 7 case based on “substantial abuse,” which is something of a catch-all provision for unusual cases.
The Eleventh Circuit Court of Appeals, which is the primary authority for Bankruptcy Courts in Alabama, Florida and Georgia, agreed with the U.S. Trustee and found that the “substantial abuse” provisions of the Code did authorize Courts to look beyond the Means Test numbers to determine whether it was “fair” for someone to get a Chapter 7 discharge in cases like this. The Court found that it would be fair for the husband to use some of his excess income to pay a portion of the wife’s credit card bills because he received a direct benefit from the charges. Importantly, this case does not mean that the Court will expect non-filing spouses with higher incomes to be responsible for their spouse’s debts. Had the husband not received a significant direct benefit from the charges, or the wife’s debts been significantly higher or completely separate (such as medical bills) the outcome would have been different. In reality, most spouses who file for Bankruptcy have already exhausted their household income in dealing with the combined debts of both spouses and Bankruptcy is a final option.
You can read more about the details of this case and the Court’s analysis on the Georgia Bankruptcy Blog. The case illustrates the importance of getting good legal counsel before filing to review the overall financial situation of both spouses and anticipate any objections to a Bankruptcy filing. Finally, if you live in a community property state, the analysis may be different so it is even more important to see a good lawyer.