In the honeymoon phase of a marriage, it is unlikely that either of you is thinking about how financially responsible the other is. But the topic of finances will and should come up eventually because you two are now a family and have to deal with joint expenses and create a combined budget.
Don’t be shocked if your new spouse tells you they had to file bankruptcy at one time. Filing bankruptcy is very common, and most bankruptcies occur through no fault of the person who filed (who is called “the debtor”). Learn what questions to ask when you find out about your spouse’s bankruptcy filing from the office of a busy Philadelphia bankruptcy attorney.
Why Does Someone File Bankruptcy?
Typically, individuals are forced to file Chapter 7 or Chapter 13 bankruptcy due to forces outside of their control. Divorce, uninsured or unreimbursed medical debt, and job loss are the most common reasons people turn to bankruptcy for help.
Bankruptcy has several powerful features that help someone in financial trouble
- Once a bankruptcy is filed, the “automatic stay” is in effect, prohibiting creditors and collectors from contacting the debtor any further about a pre-petition debt;
- Bankruptcy “discharges” unsecured debt such as medical debt, personal loans, and credit card debt, meaning, the debtor is no longer responsible for paying that debt;
- Bankruptcy allows debtors to reorganize their debt and pay off accounts in default over a three- or five-year plan;
- Once the bankruptcy is closed and the discharge order entered, the debtor is discharged of unsecured debt, caught up with secured loans or priority debts in default, and protected from collection actions and lawsuits over that discharged debt.
Sounds like a good deal, right? It is if a person qualifies. Only people making under a certain amount can file Chapter 7 bankruptcy, which is a 4-6 month process discharging the debtor of unsecured debt and allowing the debtor to legally “surrender” any secured property, like a home or a car, that the debtor can no longer afford.
If a person earns too much to file under Chapter 7, they may file under Chapter 13, which involves a repayment plan funded with the debtor’s “disposable income.” Creditors are repaid a small amount, and after three or five years, the debtor is discharged of the unpaid portion.
Chapter 13 has all of the features of Chapter 7 but is even more powerful:
- You can “strip off” second mortgages and HELOCs and have them discharged as unsecured debt if your first mortgage exceeds the present market value of the property:
- You can “cram down” a car loan to the current retail value, and pay it off over three or five years through your Chapter 13 plan;
- You can have certain past-due income taxes discharged;
- In rare cases, you can have student loans discharged.
Why Do I Need to Know All of This About Bankruptcy?
You must have a basic understanding of bankruptcy in order to have a meaningful conversation with your spouse about the reasons why they filed bankruptcy. Here are some questions you should ask.
When did you file bankruptcy? This is important because if it was many years ago and your spouse seems financially responsible now, that is a good sign. Many young adults working their first professional job out of college have no idea how credit card debt works, and often get in over their heads and must file a Chapter 7 bankruptcy.
Did you receive a discharge? Also important. If the bankruptcy Trustee and the court found that your spouse was an “honest but unfortunate debtor” and deserving of a discharge, that is a good thing. It also means that all unsecured pre-petition debt is discharged, and your spouse was or is responsible only for post-petition debt.
Why did you have to file bankruptcy? This may be difficult for your spouse to talk about, or it may be as simple as “I was a dumb kid and didn’t know how credit cards worked.” An abused spouse fleeing the marital home with no money might have run up credit cards to survive. A cancer survivor might have had uninsured procedures to live. Let your spouse tell their story.
Did you learn anything from the bankruptcy filing process? Don’t be judgmental; this is a question that must be posed compassionately. Know that filing bankruptcy requires not one, but two online courses regarding credit and financial management. If your spouse seems to be functioning well financially at present, chances are they learned something from their bankruptcy.
The fact that your new spouse filed bankruptcy is not necessarily a bad thing. It may have been just the thing they needed to learn how to be financially responsible and move on.
About the Author
Veronica Baxter is a legal assistant and blogger living and working in the great city of Philadelphia. She frequently works with David Offen, Esq., a busy Philadelphia bankruptcy lawyer.
