Bankruptcy Question

General Questions
#1

There’s this couple I know (haha) where the husband runs a small business and makes decent money but his income fluctuates somewhat. The husband pays most household bills, including the mortgage and HELOC. The couple’s house is in the name of both spouses, but the husband is solely liable on the notes. In addition, the husband gives the wife a monthly allowance which adds up to about $15 to $20k per year.

The wife has her own job from which she takes home about $30 to $35k per year. Unfortunately, the wife has a bit of a spending problem and has run up $40 to $50k in credit card debt. The husband is reluctant to help the wife with this debt since he wants to save money for their childrens’ college; retirement; etc. He fears that a bailout will not accomplish anything in the end.

Anyway, the question is this: Is the wife eligible to file for bankrupcty? i.e. would a bankruptcy court consider the husband’s income in assessing the wife’s means and ability to repay? Second, if the wife does file bankruptcy, what would the practical effect be on the family finances?

#2

I’m pretty sure it depends what state your in - different states handle community property differently.

#3

Just to add to my post, the couple’s house has appreciated substantially since it was purchased. So there may very well be at least 300k in equity in the house (which is owned as husband and wife). Obviously there is some concern as to house a bankruptcy filing might affect this equity.

#4

Your question appears to be: the wife owns a house with her husband. There is $300,000 worth of equity in the house, as well as some debt for which she has no liability. She has $40,000 to $50,000 in credit card debt. If she declares bankruptcy, would her interest in the house be considered an asset in the bankruptcy?

Am I missing something?

#5

Without knowing the state, it is impossible to answer your questions. Some states have homestead exemptions meaning you can protect your home regardless of your equity while others set the limit as low as $5000. Community property states are another factor that must be considered. If they are in my state, they could kiss the house goodbye. In fact, in most states, there is no way a BK judge will dismiss that amount of debt when the petitioner has access to that much equity in a joint ownership situation.

#6

Well, also would the Court consider the husband’s income in assesing the wife’s means?

And would the husband’s credit or finances be otherwise affected in any way?

And by the way, the couple lives in New Jersey.

#7

If it is a community property staqte. The wife’s debt is the couple’s debt. The husband could be forced to sell his business to pay the debt. If any debt is left over depending on the states home steading laws the remaing debt could be charged against the house. And both would have the debts on their credit rating.

#8

Another point to ponder:

So called “means testing” is used as part of the filing test to determine what Chapter (type) of bankruptcy the debtor may use to file. There’s a formula that is applied, which considers the median income in your state. If she’s under the limit, she can file under Ch7, otherwise, she’d have to file under Ch13.

A Ch13 is very different from a Ch7 filing. Under a Ch13, she and her lawyer would have to come up with a plan on how to repay the debts, at least in part, over a period of time. She’d effectively be put on a budget, and have to send all of her disposable income to the Trustee for distribution to creditors as specified by the plan.

She really needs to talk to somebody licensed to practice in her state.