Bankruptcy Before Marriage vs. Bankruptcy After Marriage

200323 Blog Bankruptcy, marriage

By Janet Berry-Johnson, CPA

The following is not intended as legal advice. For legal advice, including advice related to bankruptcy, please consult with a licensed attorney.

Planning a wedding can be a fun and joyous time. But if you or your fiancé are dealing with overwhelming debt and considering bankruptcy, it can be a time of confusion and stress as well.

If bankruptcy and marriage are both on your to-do list, you may be wondering which should happen first. It’s always a good idea to talk to a lawyer who’s familiar with the laws in your state and can help you think through your unique circumstances.

In the meantime, here are some bankruptcy basics and things to consider when choosing between bankruptcy before or after marriage. See our related article about rebuilding credit after bankruptcy.

Types of bankruptcy

There are two types of bankruptcy available to individuals:

  1. Chapter 7
  2. Chapter 13

Chapter 7

Chapter 7 bankruptcy involves liquidating property, using the proceeds to pay creditors, and eliminating all remaining eligible debts.

In a Chapter 7 bankruptcy filing, you can usually get rid of the following types of debt:

  • Credit card debt
  • Medical debts
  • Personal or payday advance loans
  • Some old income tax debts
  • Old utility bills and rent payments that were sent to collections
  • Most judgment debts that resulted from a lawsuit
  • Some federal and private student loans

Chapter 7 is the most common type of bankruptcy for individuals. It’s usually the best option for people who have very little income and no hope of being able to repay their debts.

Chapter 13

Chapter 13 bankruptcy is for people who have a regular source of income and the desire and ability to repay at least some of their debts. It usually allows a person to keep their home, vehicle, and certain other assets.

In a Chapter 13 filing, the debtor works with a trustee on a plan to repay creditors over a three- to five-year period. Upon completion of the payment plan, any remaining eligible debts will be discharged.

Chapter 13 bankruptcy typically allows you to get rid of all of the debts that can be eliminated under a Chapter 7 filing, plus:

  • Debts arising out of willful and malicious damage to property
  • Debts used to pay non-dischargeable tax obligations
  • Debts incurred through a property settlement agreement in a divorce or separation (except for alimony and child support)
  • Debts from a prior bankruptcy where the court denied a discharge
  • Retirement account loans
  • Homeowners or condominium association fees that became due after your filing date
  • Certain fines and penalties owed to the government (except for criminal fines)

You can file either Chapter 7 or Chapter 13 as an individual before marriage, or file jointly or individually after getting married.

Choosing to file before or after marriage comes down to whether you and your future spouse have joint debts and your income is together or separate.

Filing for bankruptcy before marriage

If one of you has an unmanageable amount of debt and the other doesn’t, it probably makes more sense to file for bankruptcy before the wedding. This will minimize the impact on the other partner’s credit and finances.

Credit scores are based on your individual credit history, and getting married doesn’t change that. (See our more detailed article about marriage and credit).

Declaring bankruptcy as an individual doesn’t directly impact your partner’s credit, whether you’re married or not. However, if you have joint debt, declaring bankruptcy could affect your partner.

For example, say your fiancé co-signed on your car loan. If you file for bankruptcy, your fiancé will become immediately responsible for that car loan. This can ultimately hurt their credit if they’re unable to pay the debt.

Filing before marriage also makes sense if the partner declaring bankruptcy has little or no income, and the other has a steady income.

Before the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, a spouse’s income didn’t impact bankruptcy filing eligibility. But that law made it so that if you are sharing a household, your spouse’s income must be included in the means test required for a Chapter 7 bankruptcy filing.

The means test is done using a series of forms (Form 122A-1, Form 122A-2, and Form 122A-1Supp) that collect your (and your spouse’s) income and expenses.

The forms then walk you through calculations using the information entered that determine whether you have the means to repay a portion of your debts. If the calculation determines you can, then you won’t qualify for Chapter 7 bankruptcy.

If your partner has significant income, filing for bankruptcy after marriage could mean you don’t pass the means test.

If you want to file for Chapter 7 bankruptcy, it might be best to file before getting married. This will allow you to start your marriage without the burden of debts you can’t afford to pay.

Exempt vs. non-exempt property in Chapter 7 bankruptcy

Filing separately before marriage can also protect the other spouse’s property from being sold to pay off creditors.

In a Chapter 7 bankruptcy, the trustee sells non-exempt assets to pay off debts. The definition of exempt property varies from state to state.

Exempt property generally includes property you need to live and work, such as:

  • A modest vehicle
  • A certain amount of equity in your primary residence
  • Household furnishings and clothing
  • Tools you need for work
  • Your retirement accounts

If one partner has a lot of non-exempt assets, the other partner may want to file for bankruptcy before getting married. That way, those assets won’t be sold by the trustee to pay off creditors.

Non-exempt assets include:

  • Newer vehicles
  • Musical instruments
  • Valuable collectibles or artwork investments
  • Expensive clothing, accessories, and jewelry

Don’t transfer assets to someone else before filing

Whatever you do, don’t try to preserve your assets by transferring them to someone else – either your partner or a friend or family member – before filing for bankruptcy.

Part of your bankruptcy paperwork includes disclosing any property you gave away within two years of filing for bankruptcy. The bankruptcy trustee can file a fraudulent transfer lawsuit and recover the property.

If you intentionally leave information out of your bankruptcy paperwork and the trustee or court finds out about it, the court can deny your bankruptcy discharge. They may even refer your case for criminal investigation.

Once you’ve decided to file for bankruptcy before marriage, do what you can to ensure your case is wrapped up before tying the knot. Getting married in the middle of a bankruptcy case can impact your eligibility for a Chapter 7 bankruptcy filing, or alter your repayment plan in a Chapter 13 case.

Filing for bankruptcy after marriage

If you and your fiancé both have a significant amount of debt and little income or assets, you might be better off filing for bankruptcy together after getting married.

Filing jointly allows you to save money on credit counseling and debtor education courses, court costs, and legal fees because you’ll only need to file one case.

Keep in mind that whether you file together or separately after marriage, both spouse’s incomes and assets will be taken into consideration for the means test.

Bankruptcy and marital property

Filing individually after marriage can still impact your spouse, depending on whether you live in a community or common law state.

In common law states, property in one spouse’s name is generally owned solely by that partner. Only assets in both spouse’s names are considered joint property. Most states in the U.S. are common-law property states.

If you live in a common-law state and file bankruptcy after marriage, any property owned solely by you is a part of your bankruptcy estate. It can be taken and sold by the trustee to pay your creditors.

Any property owned separately by your spouse will not be included in your bankruptcy. However, if you own any non-exempt property jointly with your spouse, the trustee may force the sale of the asset. The trustee will pay your spouse their portion of the proceeds, and use your share to pay creditors.

In community property states, both spouses own any property acquired during the marriage, regardless of who is on the title.
Community property states include:

  • Arizona
  • California
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin

If you live in a community property state, all your property from before the marriage and any property acquired during the marriage is part of your bankruptcy estate. This is true whether you file on your own or jointly without your spouse.

Some states allow married couples to double their property exemptions if they file jointly. In this case, you might be better off filing together if you own a lot of property.

Again, don’t try to transfer any property to your partner to avoid having to include it in your bankruptcy, as this can cause more trouble for you down the road.

If you decide to wait until after marriage to declare bankruptcy, do what you can to keep your finances separate. Don’t open joint bank accounts, buy property, or take out loans in both of your names. This will help protect your partner’s assets and make your case easier to handle.

How filing bankruptcy will impact your credit

Filing for bankruptcy is one of the most detrimental things you can do to your credit. However, its impact depends on your entire credit profile.

By the time you get to the point of filing, your credit score may already be low due to missed payments and accounts in collection.

The bankruptcy will remain on your credit report and drag down your score for quite a while. A Chapter 7 bankruptcy remains on your credit report for up to 10 years, while a Chapter 13 bankruptcy filing stays on your credit report for up to 7 years.

In the first year or so after filing, it might be challenging to get a credit card, car loan, or mortgage. However, the impact of the bankruptcy filing diminishes over time – especially if you take steps to improve your finances, rebuild your credit, and demonstrate that you can manage debt responsibly.

If you file jointly, the credit of both spouses will be impacted, which could make it difficult to buy a home or a car or even rent an apartment in the near future.

If only one of you files, the bankruptcy will only be noted on one spouse’s credit report, whether married or not.

However, if you plan on applying for a joint loan, such as a mortgage, then the credit of both spouses impacts your chance of getting approved for the loan and the interest rate for which you’ll qualify.

Some couples end up having the spouse who didn’t declare bankruptcy apply for mortgages and other loans in their name only, as it qualifies them for a lower interest rate.

Bottom line

Filing for bankruptcy can be a good way for someone struggling with debt to get a fresh start and get back on track financially. If you’re considering getting married at the same time, you should talk to a bankruptcy lawyer for help weighing your options.

Before getting married or filing for divorce, discuss your financial situation openly with your partner. Doing this before the wedding may help you avoid one of the main reasons for divorce: money troubles.

About the author

Janet Berry-Johnson is a Certified Public Accountant and freelance writer with a background in accounting and insurance. Her writing has appeared in Forbes, Freshbooks, The Penny Hoarder, and several other major outlets.

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Written on March 26, 2020
Self is a venture-backed startup that helps people build credit and savings. Comments? Questions? Send us a note at hello@self.inc.

Disclaimer: Self is not providing financial advice. The content presented does not reflect the view of the Issuing Banks and is presented for general education and informational purposes only. Please consult with a qualified professional for financial advice.

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