The Interplay Between Bankruptcy and Divorce Law in Virginia

October 1, 2009

Can separated spouses file or continue a joint bankruptcy case?

Filed under: — James H. Wilson, Jr. @ 3:03 am

Can separated spouses file or continue a joint bankruptcy case?

A husband and wife are allowed to file bankruptcy together for the sake of ease of administration, even if they are separated.  The married couple may benefit from the lower costs and fees of a joint filing and the ability to discharge joint debts completely.  A discharge of the couple’s joint debts can eliminate a potentially contentious issue in a Virginia divorce: who will pay each joint debt.  This can save the parties from costly attorney’s fees or mediation costs.  Although there is a potential conflict of interest when separated spouses file bankruptcy together, a separated couple might consider filing a joint chapter 7 case unless either one believes that together they are ineligible for chapter 7 relief, or the other spouse has engaged, or will engage, in some conduct that might jeopardize the successful completion of the case, such as transferring or concealing assets to defraud creditors, or committing perjury in the bankruptcy case about their property and debts.  When the spouses are separated, one spouse alone may be eligible for chapter 7 relief by excluding the other spouse’s income with a declaration of separate households.

A chapter 13 case presents greater difficulties than a chapter 7 case for separated spouses because of the ongoing obligation to make plan payments, the evolving goals of husband and wife during the bankruptcy and separation, and the ability of the husband or wife to discharge debts that are not domestic support obligations but that are related to divorce and separation.  The spouses may have different goals and interests: one spouse may prefer liquidation over a plan bankruptcy, or a spouse may not care to preserve a particular asset, or cure an arrearage on a mortgage on real property with no equity that serves as one spouse’s residence.  A major point of contention may be whose income will be used to fund the chapter 13 plan payments.

 When a couple separates during a chapter 13 case, counsel may be compelled to withdraw due to an actual conflict of interest between the spouses.  In such an event, the chapter 13 case can be deconsolidated into two separate bankruptcies, allowing each spouse to continue or to convert or dismiss his or her case without the consent of the other spouse.

You should consult with your bankruptcy or divorce lawyer to determine if a joint bankruptcy is in your best interest, based on all the facts and circumstances of your particular situation.

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