As a bankruptcy lawyer, I do have some basic (very basic) knowledge of accounting principles. One such principle is the “Innocent Spouse Rule.”
Stripped down, this rule is in place as a protection so individuals can avoid being responsible for their spouse’s taxes if filed incorrectly. A more coherent definition can be found here and more information can be gleaned directly from the source.
In bankruptcy, there is no special “exception” for an innocent spouse. In fact, it’s just assumed that the non-filing spouse is innocent and thankfully so.
Lately, I have seen more married debtors looking to file bankruptcy without their spouse. Their main concern is obviously whether their filing will impact their spouse.
For the most part, the answer is, “It won’t.”
A Common Misconception
There are so many misconceptions surrounding the bankruptcy process thanks to the free flow of information and so called “experts” giving their opinion. These misconceptions are too numerous to even talk about in this post.
One common misconception is that when an individual files bankruptcy, their spouse’s credit is impacted negatively. This is not true.
A bankruptcy filing will only appear on the filing spouse’s credit report and will only impact the filing spouse’s credit score.
I wonder how many individuals were dissuaded from filing bankruptcy for fear it would negatively impact the credit of their partner.
While the filing will not hit the non-filing spouse’s credit, it should be noted that the non-filing spouse will be solely responsible for any joint debts. This does not change the legal status of the debt from prior to filing.
Take Heed Your Assets
While a bankruptcy filing will not negatively impact your spouse’s credit, it is important to consider jointly held assets prior to filing.
Non-exempt assets become part of the bankruptcy estate and can be liquidated by the bankruptcy trustee for the benefit of creditors. This is so even if an asset is owned jointly with your non-filing spouse.
This can create a bad situation, especially if your non-filing spouse is not completely involved with the bankruptcy process.
This is why it is extremely important to (1) consult with an experienced bankruptcy lawyer prior to filing; and (2) make sure your spouse is on board with your decision to file.
I will not take a case where someone is keeping their bankruptcy filing secret from their spouse.
Ultimately, the non-filing spouse is innocent in bankruptcy as long as they are aware of and part of the filing process.
Image courtesy of midiman (Flickr).