bankruptcy

Can only one spouse file bankruptcy?

Justin Harelikq_v2.gifDear Bankruptcy Adviser,
Can a spouse file bankruptcy in a case where a new business has failed, and there is no money left to pay the lease payment on the building? The other spouse has not signed anything in regards to the business. Can just the spouse who opened the business file bankruptcy without it affecting the other spouse? The lease was personally signed by me and two partners, but not my husband.

-- Heather

a_v2.gifDear Heather,
Yes, one spouse can file without the other. This is done all the time. The most common time to file one spouse only is when you have just gotten married and one spouse is burdened with unmanageable amounts of debt. 

However, this does not mean you ought to take this approach. While you can file bankruptcy without an attorney, you ought to consult with one in your area that could thoroughly assess your household's financial picture. 

My answer is generic because I do not know the specific facts of your case. Here are a few things to consider before filing an individual bankruptcy:

Did you personally guarantee the corporate debt? The corporation can take on liability for debts, but most lenders will not blindly lend money to a corporation without more security. Typically, this is done when one of the principals of the corporation (i.e., you) agree to guarantee the debt with personal assets and personal liability. 

This means that your personal assets -- car, house, investments, even furniture -- are used as potential ways to pay back the debt you incurred while operating the business. Most of these items may be protected in bankruptcy, but each state has different bankruptcy laws regarding real and personal property. Real property is your home or other rental property.

Do you live in a community property state? There are nine community property states -- Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. While you can still file bankruptcy on your own, the potential risks to the nonfiling spouse are much greater.

The nonfiling spouse could be subject to creditor (or collection agency) lawsuits trying to make him liable for the debt that you incurred running your business. While it may be possible for him to defend himself and prove that he is not responsible for the debt, this could be costly and could ultimately be unsuccessful. As a result, he could be forced into bankruptcy.

Please note that you should always have to qualify your household for bankruptcy. It is not reasonable for one spouse who has no income to file bankruptcy on debt while the other spouse is earning a substantial income. In general, in both community and noncommunity property states, the household must qualify for bankruptcy and not just the individual.

There are many other issues to consider when trying to file one spouse individually. As I stated, you can file bankruptcy without an attorney, but the consultation might be well worth it to expose any potential pitfalls.

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