How Does Separation From Your Spouse Affect Bankruptcy?

Spousal Separation — Overland Park, KS — Wiesner & Frackowiak LC

For many couples experiencing the breakup of a marriage, legal separation is an important tool to smooth the transition and protect themselves. But it can also make things more challenging if you simultaneously need to seek debt relief through legal bankruptcy. How do these two processes affect one another? Here are a few answers to the most common questions.

Can You Seek Bankruptcy While Separated?

The short answer to this question is yes. Individuals nearly always have the option of declaring personal bankruptcy with or without their legal spouse. Individual bankruptcy focuses on the petitioner’s assets and obligations. The amount of joint debts and assets linked to your spouse would determine how affected they may be if you file separately.

If you are not currently living with your spouse in an informal separation, you can generally exclude some or all of your spouse’s income — to the extent that it does not contribute to the payment of shared marital expenses — when making bankruptcy calculations. Anyone with a finalized legal separation agreement usually doesn’t have to include their spouse’s income at all.

How May Separation Complicate Bankruptcy?

Like divorce, legal separation can cause some confusion and risk when it coincides with bankruptcy.

For instance, if you have moved from the family home to a nearby state, your case would be governed by the bankruptcy rules within your new state. Each state has its own rules for what can be exempted from liquidation. For example, Missouri allows only $3,000 exemption for a car while Kansas allows exemptions of higher value. However, if your separation is filed in your spouse’s state, the two rulebooks may be quite different.

In addition, declaring bankruptcy before all your marital assets and debts have been divided may leave both of you open to risk. When they file individually, a debtor may be legally freed of their obligation to pay a joint marital debt. However, you may not be discharged of your responsibility to your spouse and joint debtor for that payment.

Finally, debts that are assigned to you as a result of the separation agreement may not have been included in your bankruptcy discharge petition. And debts left off this list are generally not eligible for discharge after the fact.

Should You Wait to Declare Bankruptcy?

Timing is one of the biggest issues when separation and divorce are both imminent. Filing as a couple before pursuing a legal separation agreement could make the division of marital assets easier during Chapter 7 bankruptcy. After all, a number of debts and even some shared assets will already have been discharged or liquidated.

However, spouses filing Chapter 13 may find that their post-separation income doesn’t reflect their pre-separation income. Monthly repayment plans determined before the separation are affected and may need to be reevaluated by the court.

While you can file bankruptcy while still negotiating a separation, it’s not often recommended. Many elements of your finances — including support payments, asset division, and debt division — are still in flux and will affect both Chapter 7 liquidation and Chapter 13 payment amounts.

The final option is to wait until your separation agreement is negotiated before assessing your bankruptcy options. This may make things more transparent and easier for you to calculate. However, you would continue to suffer from creditor harassment, repossession or foreclosure, and deteriorating credit history in the meantime.

Obviously, you have many factors to consider when deciding how to handle both separation and personal bankruptcy. Your best ally is an experienced bankruptcy attorney in your state. Kansas and Missouri residents have relied on the legal team at Wiesner & Frackowiak, LC, for more than 20 years. Call today to make an appointment and evaluate together your specific circumstances.

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