Under the Bankruptcy Code, they CAN file a joint bankruptcy. Maybe they SHOULD. But only with separate attorneys?
They CAN File Together
A “joint case” is defined by the Bankruptcy Code as simply one filed “by an individual… and such individual’s spouse.” “Spouse” is not defined in the Code, but could only possibly refer to someone who is legally married to the “individual.” So, spouses contemplating divorce can file bankruptcy together according to bankruptcy law.
Debts and Assets Are as of the Date of Filing
The hidden question is whether it’s better to file bankruptcy first, or the divorce. Without digging into that here, it’s crucial to understand that a bankruptcy case affects only debts that exist as of the time of the filing of the case. (Section 727(b).) Future debts can’t be included. So filing a bankruptcy case before the filing of the divorce will not affect the debts and obligations arising out of that divorce.
Same thing regarding assets—the assets at play in a bankruptcy case are only those the debtor(s) own “as of the commencement of the case.” (Section 541(a)(1) and (2).) So assets subsequently acquired, such as through a divorce, are not part of the earlier-filed bankruptcy case.
(In a Chapter 13 “adjustment of debts,” assets and earnings “after the commencement of the case” ARE at play (Section 1306(a)(1) and (2)), which is part of the reason this blog is focused only on Chapter 7 “straight bankruptcy.” Spouses seriously contemplating divorce have not business filing a 3-to-5-year Chapter 13 case jointly.)
When SHOULD Spouses Contemplating Divorce Contemplate Filing a Joint Bankruptcy?
One sensible answer to this question is “never.” Two spouses can file individual bankruptcies at any time—they are not REQUIRED to file jointly. If they are seriously thinking about divorce, the odds are high that their interests are diverging, both in a legal sense and in a human sense. That being said, they should file a joint Chapter 7 case if doing so is in each of their independent interests. That means BOTH that the best option for each of them is to file a Chapter 7 case, AND the best option for each of them is to file that Chapter 7 case jointly. Let’s look at these one at a time.
When Filing Chapter 7 Bankruptcy Is in Each Person’s Best Interest
There are actually two related questions here: 1) Is filing a Chapter 7 case in each spouse’s best interest? 2) And is doing so before the divorce also in each spouse’s best interest?
The first question involves the usual analysis of each person’s debts and assets, income and expenses, and other pertinent questions; a review of the options; and then a determination that Chapter 7 is the person’s best alternative. The legal interests of the two may be completely the same—especially if they share the same debts and assets, and their income and expenses are similar. Even if they are not, filing a Chapter 7 case may still be the best for each. But again, this needs to be analyzed very carefully, including whether it is sufficient for only one spouse to file, or whether Chapter 13 would instead be better for one or the other.
The second question is more involved, requiring a projection into the future about what would likely happen in the anticipated divorce, especially regarding the division of assets, and the division of any remaining debts—any that would not be discharged in the Chapter 7 case, including those voluntarily reaffirmed, such as debts secured by vehicles. The fact is that although the obligations arising from the division of marital assets and debts cannot be discharged in a subsequent Chapter 7 case, they can be in a subsequent Chapter 13 one. So arguably the only way to be able to say that filing before a divorce is better is if there will be no division of assets and debts to split in the divorce. And that would be the case only if the prior bankruptcy writes off every debt, and leaves the spouses with very little assets to split in the divorce.
When Filing a JOINT Chapter 7 Bankruptcy is in Each Person’s Best Interest
Assuming that filing a Chapter 7 bankruptcy case, and doing so before filing divorce, is in both spouse’s best interest, then the difference between filing a joint bankruptcy case versus two separate ones is one of cost—in filing fees and attorney fees. And possibly in how much of their joint assets the couple can protect.
Starting with the asset issue, many state property exemption schemes provide different dollar amounts of protection per person on certain kinds of property depending on whether an individual or joint bankruptcy case is filed. As a result, in certain select situations more assets may be able to be protected with two separate filings than a joint one. This is a highly local issue that needs to be carefully reviewed with your respective attorneys.
Otherwise, the main practical difference between a joint filing and two separate ones is the cost. The filing fees on individual and joint filings are the same, so the filing fee will be twice as much for two individual filings. And most attorneys will charge about the same or at least not much more for a STRAIGHTFORWARD joint Chapter 7 case compared to a STRAIGHTFORWARD individual one.
Legal and Ethical Obligation to Have Separate Attorneys
However, we’re NOT talking here about straightforward cases. Attorneys are ethically not permitted to represent two parties who have a legal conflict of interest. It will be quite rare that any two spouses—much less ones on the way to getting divorced—would not have any legal conflicts of interest. At the very least, an attorney would have to spend a fair amount of time determining whether a conflict of interest exists, and whether he or she could ethically represent them in a joint bankruptcy case.
Attorneys also have an obligation to preserve clients’ confidences. And to diligently fight on behalf of their clients. There is a serious question whether a single attorney could fulfill these obligations with a husband or a wife who may well be reluctant to be candid with the attorney in the presence of his or her spouse.
As a result, many attorneys will simply not agree to represent about-to-be divorced spouses wanting to file bankruptcy. At the very least, they will insist that the parties get independent advice from other attorneys, perhaps from the spouses’ respective divorce attorneys. And even if the attorney does decide that joint representation is ethically permissible, he or she will likely charge more for the significant extra time involved, and/or insist on being paid up front considering the additional risks involved.
Conclusion
Married couples can file a joint Chapter 7 bankruptcy case as long as they are legally not divorced, but doing so is very seldom the best move. You each DO need independent legal advice about the best way to go, in the short term and the long term. If you meet with an attorney who seems very willing to file a joint case for you, without carefully going through the issues discussed above, you should be concerned about whether he or she has your interests foremost in mind. And avoiding these concerns by trying to file a joint bankruptcy without an attorney is doubly dangerous—you’d not be getting advice about your options when you would already normally very much need to do so, plus would be doing that during the legally and emotionally very vulnerable pre-divorce period. Make sure you get advice, independently for each of you.