- Can One Spouse File Bankruptcy Alone?
- The Bankruptcy Estate and Jointly Owned Property
- Asset Disclosure Required
- Chapter 7 Asset Liquidation and Jointly Owned Property
- Protecting Non-Exempt Jointly Owned Property in Chapter 7 Bankruptcy
- Is It OK to Re-Title Property to Non-Filing Spouse?
- File Chapter 13 Instead
- Joint Asset Ownership in Chapter 13 Bankruptcy
- Jointly Owned Property in Bankruptcy: The Bottom Line
A bankruptcy filing in Michigan is a serious decision that can and will affect the entire family.
On the positive side, relief from the debt of even one family-member can directly and immediately improve the lives of every member of a household. On the other hand, families own property together as well.
Jointly owned property can present a specific challenge in Michigan Chapter 7 and Chapter 13 bankruptcy cases. It presents the specific question, “If my spouse files bankruptcy without me, will I lose jointly owned property?”
The answer is—it depends.
This Article will the nature of bankruptcy, the so-called “Bankruptcy Estate,” and the question of whether or not a single family member’s Chapter 7 or Chapter 13 filing will endanger your property.
First, a basic question.
Can One Spouse File Bankruptcy Alone?
Just because you are married does not mean you must file bankruptcy jointly with your spouse. To the contrary, it is entirely optional whether to file a Chapter 7 or Chapter 13 bankruptcy singly or jointly.
Filing alone, however, does not mean that your spouse is “not involved” in your bankruptcy proceeding.
The bankruptcy Means Test, for instance, is calculated based on household income and not simply the income of a single filing debtor who happens to be married.
As a reminder, the Means Test is the form and mathematical formula that determines whether you are eligible to file Chapter 7 bankruptcy at all. It averages the gross monthly income from all non-Social Security or VA benefits sources from each wage-earning member of the household whether they have jointly filed the bankruptcy or not for each of the 6 months prior to the bankruptcy filing debt.
If that total household income is too high, the spouse filing the bankruptcy will be required to file a Chapter 13 bankruptcy rather than Chapter 7.
Thus, the spouse filing for bankruptcy may earn a low amount of income, but, if the non-filing spouse, is a high earner, the filing spouse’s Chapter 7 eligibility will be impacted.
Likewise, household income is averaged and disclosed along with necessary household expenses in Schedules I and J of the bankruptcy petition. Even if you “pass” the Means Test, if your income and expense line-items reveal luxury-level spending by either spouse or any level of “bad faith,” this will be a problem. (What is “bad faith?” There is no specific definition, but an example would be not paying creditors so that the household can support the monthly installment payment of the non-filing spouse’s 2022 Porsche)
And, as noted above, jointly owned property will be subject to the bankruptcy case filed by one spouse alone.
Why? How is this possible?
The Bankruptcy Estate and Jointly Owned Property
When you file a Chapter 7 or Chapter 13 bankruptcy case in Michigan, you automatically create something called “the Bankruptcy Estate.”
The Bankruptcy Estate is a legal “house” which contains everything you own or have a claim to owning as of the date that you file your bankruptcy case. It is similar to the probate estates that are created under Michigan law after someone passes away without a proper will or with a simple will lacking a trust mechanism.
Also similarly, the Bankruptcy Estate is created for the benefit of—your creditors.
The value of your Bankruptcy Estate works differently in Chapter 7 than in Chapter 13 bankruptcy. Although it exists, in both forms of consumer bankruptcy, for the benefit of your creditors, how it benefits them differs.
In either case, though, importantly for this topic, the Bankruptcy Estate only contains the property of the filing debtor.
It does not contain property owned entirely by a non-filing spouse.
Jointly owned property, on the other hand, is swept into the Bankruptcy Estate—but only to the extent of the debtor’s own interest in the property.
Asset Disclosure Required
First, let us answer what is maybe our least favorite question to be asked: “Do I have to disclose all of my assets? Can’t I just leave it off the schedules? Who would ever know?”
We’re that you would never ask such a question. But let’s be clear. When you ask this sort of question, what you are really asking is, “Is it okay if I commit perjury, commit the Federal felony crime of Bankruptcy Fraud, and risk going to jail for 5 years just to keep my spouse’s used Toyota a secret?”
We’re guessing you didn’t quite mean that—but, yes, that’s you really asked.
All assets must be disclosed by the debtor if he or she has any claim to it or any percentage of ownership interest whatsoever.
The very first question that you will be asked at your 341 Meeting of Creditors hearing, in which you testify and answer questions about your debts and income and assets under oath, will be, “Did you disclose everything that you own?”
You want that answer to be an honest, “Yes.”
Chapter 7 Asset Liquidation and Jointly Owned Property
That all said, it is natural to feel protective about your property. It is even more natural to feel protective about your spouse. So we forgive you for asking such an untoward question up there.
However, let’s discuss the reality behind the understandable fear.
Chapter 7 bankruptcy is a “liquidation” bankruptcy. This means, on one hand, that you are able, in Chapter 7, to “liquidate” your debt. That is, you discharge your debt entirely without the need to pay any of it back to your creditors. (Note that there are some types of debt, such as child support obligations, that are excepted from bankruptcy dischargeability.)
It also means that your property can be liquidated in Chapter 7 bankruptcy.
In a Michigan Chapter 7 bankruptcy, a person known as the Chapter 7 Trustee is assigned by the Bankruptcy Court to serve as Trustee of your Bankruptcy Estate.
It is the Trustee’s job to seize the assets of the Bankruptcy Estate and to sell them off (liquidate them) in order to generate a pool of cash with which to repay some of what you owe to your creditors.
Don’t panic! Most people who file Chapter 7 bankruptcy in Detroit don’t lose any property. The reason for this is that the Chapter 7 Trustee may only seize assets that are in your Bankruptcy Estate.
The US Bankruptcy Code and Michigan state law allow you to “exempt” (remove) certain types of property up to certain dollar value limits from your Bankruptcy Estate. If property is exempted, whether solely or jointly owned, it cannot be seized and liquidated.
Property owned only by a non-filing spouse never enters the Bankruptcy Estate to begin with.
Protecting Non-Exempt Jointly Owned Property in Chapter 7 Bankruptcy
So how do you protect your spouse’s jointly owned property in your Chapter 7 bankruptcy case?
First, remember that you only need to exempt your share of the property’s value! Thus, if you own an oil painting jointly with your spouse that will auction for $50,000, your share of the value is $25,000. That is the number that must be exempted. Or negotiated.
Get Expert Legal Help
The first way to protect any property in bankruptcy is to consult an experienced Michigan bankruptcy attorney before filing any case whatsoever. A skilled bankruptcy lawyer will analyze your household asset picture to determine whether a Chapter 7 bankruptcy may be too costly in terms of asset loss than it is worth in debt dischargeability.
Only an experienced Detroit bankruptcy attorney will be able to provide you an accurate forecast of the danger to your assets inherent in a potential bankruptcy filing.
Obtain Accurate Valuations
Beyond that, the next important step to take is to properly value all of your jointly owned property.
Often, the value of an item of property is in the eye of the beholder. The eye of the Chapter 7 Trustee always sees great value—even where there is none. (It is important to remember that Chapter 7 Trustees are compensated with a percentage of whatever they liquidate for creditors. They are not impartial participants in the Chapter 7 process, therefore, but active and interested profit-seekers.)
Good appraisals from experienced and, where applicable, licensed and certified appraisers will go a long way toward resolving disputes with Chapter 7 Trustees and creditors regarding the value of your jointly owned property.
Negotiate with the Chapter 7 Trustee
A Chapter 7 Trustee is required to obtain the most cost-effective result for your creditors possible under the circumstances whenever an issue regarding asset liquidation arises. This means that the Chapter 7 Trustee will nearly always entertain and negotiation settlement offers.
Even for Chapter 7 Trustees, settlement often makes more sense than litigation.
You will need an experienced Detroit bankruptcy attorney to assist you with such settlement negotiations.
Don’t File Bankruptcy at All
For a minority of prospective Michigan bankruptcy filers, an inability to exempt jointly owned property or to offer a settlement payment means that bankruptcy may not be the best option for you at all.
If your bankruptcy is over-complicated by jointly owned property, it is worth discussing non-bankruptcy options with your bankruptcy attorney.
The Other Bankruptcy Option
The final and often best way to protect jointly owned property that is not fully exempted in Chapter 7 is to file a Chapter 13 bankruptcy instead.
First, before discussing Chapter 13 and jointly owned property, let’s answer another “don’t even think about it!” question.
Is It OK to Re-Title Property to Non-Filing Spouse?
No. This is also Bankruptcy Fraud.
Further, it won’t work. The Chapter 7 Trustee is also empowered to “avoid,” or unwind, fraudulent transfers.
As defined by the US Bankruptcy Code, a fraudulent transfer is the transfer of any property (or cash) from the debtor to another party within 2 years of the filing debt for less than the property is worth. (The transfer must also be outside the course of the debtor’s usual business, providing an exception if one’s business involves selling stuff.)
This definition does not require that the Trustee prove that you had any intent defraud your creditors. It’s just dollars and cents, and timing.
The Chapter 7 Trustee can also recover fraudulent transfers under Michigan state law. Michigan’s fraudulent transfer statute does require that intent to defraud be proved, but it has a 6-year look-back period rather than just 2 years.
Long story short, the Trustee will get that fraudulently transferred property back from your spouse, one way or another.
File Chapter 13 Instead
Why is Chapter 13 bankruptcy a superior form of bankruptcy in cases where non-exempt jointly owned property is at issue?
It is because no assets are liquidated in Chapter 13 bankruptcy.
Chapter 13 is not a “liquidation” bankruptcy. It is, instead, a “reorganization” bankruptcy in which you repay your debts at least in part over 3-5 years through a Court-supervised and -enforced payment plan.
Because you repay what you can afford to repay (only—see our other blog posts for more on how creditors are repaid in Chapter 13), there is no need for an asset liquidation mechanism.
This does not mean that the joint ownership of marital assets does not have any effect in a Chapter 13 bankruptcy in Michigan.
Joint Asset Ownership in Chapter 13 Bankruptcy
As with Chapter 7, you still create a Bankruptcy Estate upon filing of a Chapter 13 bankruptcy. You must still go through the exercise of disclosing and listing all assets in your bankruptcy petition schedules, as well as assigning values to each item of property. You must still disclose your ownership interest percentage (1-100%).
You must still, and ideally will, exempt your equity in all property in a Chapter 13.
If you cannot fully exempt jointly owned property, the consequence in Chapter 13 is not losing the property. Instead, the consequence is that you will be required to repay more of your debt to your unsecured creditors than you would if you didn’t have non-exempt property.
In Chapter 13, creditors are repaid with a monthly plan payment you make to the Chapter 13 Trustee. The amount of this payment is premised upon your net monthly (after expense) household take-home pay. (Yes, that includes your non-filing spouse’s income as well.)
Your creditors repaid in a priority order mandated by the Bankruptcy Code. Unsecured debts, such as those arising from credit card and medical and back rent and other such obligations, are paid last.
Unsecured creditors are not required to receive any specific amount of money from your Chapter 13 plan, so long as it is not a negative amount.
However, if you own non-exempt assets, your unsecured must receive (as a class or group of creditors) a minimum amount of money that is equal to the total value of your non-exempt solely or jointly owned property.
If your Bankruptcy Estate thus includes that $50,000 jointly owned painting mentioned above, you would be required to make a plan payment high enough to pay $25,000 to your unsecured creditors after all higher priority creditors are paid through your Chapter 13 plan.
This could drastically increase your monthly Chapter 13 plan payment.
But nobody would take your spouse’s favorite painting.
Jointly Owned Property in Bankruptcy: The Bottom Line
The bottom line is that, if your spouse owns valuable property, you need to consult an experienced bankruptcy attorney regardless of whether he or she plans to file jointly with you.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has successfully represented thousands of Metro Detroit Chapter 7 and Chapter 13 clients for over 30 years.
If you are considering filing for bankruptcy in Michigan, contact us now to schedule your free initial consultation.