If only one member of a couple files a voluntary petition and becomes a debtor in bankruptcy, the debtor must disclose the total family income, including that of the non-filing spouse. If the total income exceeds certain limits, the debtor is in ineligible to get relief under Chapter 7 (total bankruptcy). The reasoning for this is a good faith type of rule. If the family is well off enough to pay some of its debt, then it ought to do so, rather than having all unsecured debt discharged without payment under Chapter 7. The basic assumption is that all of the non-filing spouse's income is available to pay the debts of the debtor. This means both spouses' income must be reported.
However, the law does allow the debtor to claim an adjustment to the marital income to allow for the fact that the non-filing spouse may have his or her own financial obligations that must be paid, or else that spouse's credit would be ruined and he or she would be sued for default on his or her car payment, credit cards, or other debts, if those dollars were used instead to fund up the debtor's bankruptcy repayment plan.
So far, so good. This all seems logical...except in one recent case.
The United States Trustee objected to the debtor's Chapter 7 filing, which included several claimed deductions from total family income to allow for payments on debts solely in the non-filing spouse's name. These included the house and a truck, which were only in the non-filing spouse's name and which she made all the payments on. Other deductions were claimed on a student loan in her name, a 401k loan in her name, and credit cards only in her name. The US Trustee argued that those deductions were not legitimate, and instead of the non-filing wife making those payments, she should divert those funds to her husband's bankruptcy case so he could fund a Chapter 13 repayment plan of his debt – leaving her debt unpaid.
Upon receipt of the US Trustee's argument, the debtor and his wife were very upset. They asked how can this possibly be right, fair, or reasonable? Fortunately, the US Trustee changed his mind and relented after being presented with documents proving the truth of the wife's debts and an explanation of the consequences that not paying them would cause.
The take-away point is be prepared to produce debt and income records for both spouses, even if only one is filing for bankruptcy.
By: Marcus H. Herbert, Attorney at Law
