If you are married, or in a de-facto partnership, and are considering filing for bankruptcy, you need to understand how this decision will affect your spouse or partner. Declaring bankruptcy is a major decision that could have significant long-term financial and legal consequences for you and your spouse. This article explains how your bankruptcy might affect your partner, and what you and your spouse need to consider when deciding whether to file for bankruptcy.
What is bankruptcy?
If you’re struggling to get on top of your debt, are being harassed by creditors and your credit history is preventing you from entering into an informal debt arrangement such as debt consolidation, then bankruptcy might be an option for you. Bankruptcy is a legal process where you’re declared unable to pay your debts. It can release you from most debts, providing relief from the stress and allowing you to make a fresh start. However, it isn’t a decision that should be taken lightly, as bankruptcy can have a significant impact on your life and that of your family’s.
You can either chose yourself to become bankrupt (called voluntary bankruptcy), or under certain circumstances your creditors may apply to bankrupt you through the courts, which is called a Creditor’s Petition. Once you have been declared bankrupt, you can either nominate a trustee or the Australian Financial Security Authority (AFSA) will appoint one for you, to manage your finances on your behalf. Your trustee that will be in charge of the liquidation of your assets and use the proceeds to repay your creditors.
How to file for bankruptcy when married
It’s increasingly normal in marriages to keep most of your finances separate, however there may be joint assets like the family home. If it’s only one of you having issues paying back your debts, then you’d likely to declare bankruptcy as an individual. When you declare bankruptcy as an individual, and not as a couple, your spouse would be a non-debtor (or a non-filing spouse) and their credit rating, personal assets, and income will not be affected by your bankruptcy.
For example, if your husband filed for bankruptcy as an individual, just his debts will be discharged. In such a case, you would be regarded as the non-filing spouse. In this situation your husband’s declaration of bankruptcy will not affect your credit rating, personal assets, debts, or income.
But even if you file for bankruptcy separately, the non-filing spouse will have to show their detailed financial statement showing their joint asset and liabilities, personal income, and assets. This information is important for the determination of compulsory repayment as it will show the overall financial status of the marriage.
However, there are cases where an individual filing for bankruptcy will affect their non-filing spouse. Here are the examples.
- When assets, such as property, are co-owned by both partners, the non-filing spouse will be affected by the filing spouse.
- The non-filing spouse will be affected by his/her filing spouse if they serve as the guarantor for their filing spouse’s debts.
- If the non-filing spouse has joint liability with his or her spouse.
But if the debts obligations are held mutually, the non-filing spouse will still have to continue to pay back any debts even after their partner has petitioned for bankruptcy.
Bankruptcy effects on spouse’s assets
Not all assets that you own or co-own with another person will be affected in a bankruptcy. Necessary household goods and low value assets, for example, are protected and cannot be sold by a trustee to satisfy your debts. If you and your spouse have a joint vehicle and it’s beneath a certain value, the trustee will permit you both to keep it.
If the family home is jointly owned, the joint tenancy is automatically severed upon the bankruptcy of any one of the joint tenants the home ownership will change from joint tenants to tenants in common. The bankruptcy trustee can then sell the bankrupt spouse’s share in the family home. If the non-bankrupt spouse cannot afford to buy out the bankrupt’s share, then the whole home will be sold. However, if the bankrupt spouse does not have any ownership in the house, it is likely it won’t be impacted by the bankruptcy. Although, if it is discovered that the bankrupt spouse has transferred ownership of any assets to their spouse before filing for bankruptcy with the intention of preventing creditors from claiming them, then these might be recovered by the trustee.
Filing as a couple
If you and your spouse are both filing for bankruptcy, you will both be required to complete the bankruptcy paperwork and submit them separately. A couple may both file for bankruptcy but maintain separate estates, or they may file together as a joint estate. The financial details on both petitions must mirror those listed on the other, we recommend consulting a bankruptcy professional to ensure everything is completely correctly and the process goes smoothly. When filing for bankruptcy as a couple, all individual and shared assets and liabilities will be considered by the trustee, and both partners will be equally impacted by the bankruptcy.
What happens when you declare bankruptcy?
Although over the short-term bankruptcy can provide you relief from your unpaid debts, there are many consequences. Below are some matters that you really need to consider before entering into bankruptcy:
- Some assets may be used to cover your debts.
- If you have over a certain amount of cash on hand in your bank account, it may be used to cover your debts.
- If you inherit or win money or property while you are bankruptcy, it will be impacted.
- If you earn over a certain amount, you may have to pay contributions towards your debts.
- Some industries will not allow those that work in the profession if they are bankrupt.
- You can only be a director of a company or otherwise actively involved in the management of a company, if approved by the court.
- Your credit report will be impacted for up to 5 years or 2 years from your discharge, whichever is longer, and will be publicly listed on the National Personal Insolvency Index indefinitely. It may also have an effect on your ability to rent property, access telecommunications and other services.
- You can only borrow up to a certain amount, accept goods on credit or hire purchase up to a certain value, or offer to supply goods or services up to a certain value without disclosing to the lender or customer that you are an undisclosed bankrupt.
- You can only travel overseas with the permission of your trustee.
- You can only take or continue legal proceedings without the permission of your trustee except in relation to personal injury to you or your family.
Remember, when you file for bankruptcy as an individual, the bankruptcy will only affect your debts. However, filing for bankruptcy can be a tricky proposition at the best of times. For married or de facto couples, the situation becomes more complex, and your spouse may be affected despite your best efforts.
Your spouse is not required to file for bankruptcy because you have, and their credit score is not affected unless they are unable to pay debts in their name. However, bankruptcy does affect spouses in indirect but serious ways
It is critically important to consider all your options before you file for bankruptcy when you are married, so you can make the best possible decision based on your specific circumstances. Before you reach any decisions, it’s important to seek professional advice to ensure you informed of the process and fully aware of your rights and responsibilities. If you have any additional questions on married people filing for bankruptcy, please don’t hesitate to contact us for a free consultation to discuss your specific situation.