Uncertain Laws and Risks When Spouse Does Not Join in Bankruptcy

One of the more common complexities in bankruptcy arises when one spouse needs to file bankruptcy and the other cannot or does not want to do so.  The reason for this, in my opinion, is the poorly worded statute and the small number of cases decided on this issue.  There are, in short, some gray areas.

Let’s start with how the law initially works.  First, it requires that the non-filing spouse declare all of their income—even though they are not filing bankruptcy.  (I don’t like it either) Then, the non-filing spouse must complete what is the called the marital adjustment.  This is where the non-filing spouse deducts those expenses which he or she expends on him or herself alone.  The remainder or difference is assumed to be household contributions and, therefore, is included in the filing spouse’s income for purposes of determining whether the debtor is over the means test and thus a chapter 7 or 13.

Example

An illustrative example will provide helpful.  Assume that husband needs to file and his wife does not.  Husband’s income is $50,000 and wife’s income is $35,000 and there are no children.  For a household of two, the means test threshold is around $65,000. That means if the husband can show that household income is $65,000 or less they can file a chapter 7 without a problem.  But under this example the combined income is $85,000, well over the means test.  But yet, the wife is not filing.  We reconcile these seemingly incongruous facts with the marital adjustment.  That is to say if we can show that the wife spends $20,000 or more on herself and herself alone we can qualify spouse for a Chapter 7.  What sort of expenses qualify? A good question with no simple answer.  But let’s start with the expenses that count without any question.

Expenses Allowed

These include the non-filing spouse’s: Taxes, debt payments that are not jointly held with the filing spouse, personal insurance that does not cover the filing spouse and prior support obligations.  These can often be enough to get the spouse into a chapter 7.  But what if they are not? What other expenses qualify?  What about personal hobbies? How about expenses that may be considered indulgent such as monthly spa visits or massages?   Does the non-filing spouse have to stop going to her masseuse? And what of tennis lessons or trips to visit ill parents?  Good questions and unfortunately there are not definitive answers.  The best I can do say this: It depends. Maybe they will and maybe they won’t.

More Examples

So in the above example, say the non-filing spouse has $10,000 a year in taxes, $3,000 a year insurance, $3,600 a year in personal car payments for a preliminary marital adjustment of $16,600.  To get into clear chapter 7 territory we need to find another $3,400 or about $284 per month that the non-filing spouse spends on herself and that are acceptable to US Trustee, the branch of the federal government that governs this area of the law.  Herein lies the catch.  It can be a bit of a tightrope because the US Trustee has a certain opinion on what should be allowed and what should not.  In general, I can usually find an extra $284 per month especially if given some time to prepare and strategize the filing. However, it does require a thorough understanding of your circumstances, the law and the US Trustee. And maybe the gumption to put up a fight.

As you can see, you really need an attorney who has done these cases before, who has engaged the US Trustee on these issues and understands their position.  A solid relationship and reputation with the US trustee does not hurt either.  This is tricky stuff.

This area in Colorado is also a great example of the contrast between a practical approach and an adversarial approach to the law.  This is because when there are ambiguities in the law as I believe there are here, the US Trustee has to take a position.  It does not mean they are always right but it is helpful to know where they stand and where the battle lines are drawn.  Most people would like to, if at all possible, obtain their objective without a costly fight.  I know the position of the US Trustee and although I believe it could be challenged in court with success, I know how to avoid the fight in most cases. But like anyone else, if a fight is required, I will not back down from it.