As a general rule, a person is not liable for the debts of their spouse,except for debts associated with necessities of life (i.e., medical debts) or debts that you voluntarily cosign. Aside from medical debts and cosigned debts, you are not liable for the debts of your spouse. You marry the person, not their debts. (Marrying for money is another story altogether.)
For this reason, it is not necessary or advisable for both spouses to file bankruptcy when only spouse is in debt. However, when only one spouse files the bankruptcy and the other spouse spends lots of money on items that may appear extravagant or unnecessary, the bankruptcy trustee may scrutinize the debtor’s household budget. And by the term “scrutinize” I mean the trustee may seek a dismissal of the case or push for a higher monthly bankruptcy payment.
So what right does a Trustee have to complain about expenses of the spouse who is not in bankruptcy? The spouse are not in bankruptcy, so why can’t he or she spend whatever they want?
In fact, bankruptcy courts struggle with this non-debtor spouse issue. What makes these cases even more difficult is that the non-debtor spouse frequently has higher income and spends a great deal on expenses that, if eliminated, would enable the debtor to pay most if not all of their debts. That is a bitter pill for the trustees and courts to accept.
Courts look to several factors when reviewing the expenses of a non-debtor spouse:
- Does the non-debtor spouse earn income? When expenses of the non-debtor spouse seem excessive, the court will not approve a case when that spouse does not bring home income to pay for the expense.
- Does the non-debtor spouse maintain a separate bank account? Courts look to see what the non-debtor spouse normally contributes to household income. If the couple share a single bank account the court may rule that all of the non-debtor spouse’s income is part of the debtor’s household income.
- Proportionality. Does the non-debtor spouse pay a percentage of the necessary household expenses in proportion to the income they generate as a couple? For example, if the non-debtor spouse earns 60% of the family income but proposes to only pay 25% of the necessary household expenses, it is doubtful the case will be approved.
- Ability to Curtail Expenses. Even though a non-debtor spouse’s expenses may be outrageous, it may not be possible to reduce them. If the spouse has a large student loan obligation that consumes most of their monthly income, the expense will be allowed since it cannot be eliminated. On the other hand, entertainment expenses such as golf or travel may be more easily reduced or deferred.
When a high income non-debtor spouse is present, special caution and planning needs to be performed by the bankruptcy attorney. It will be necessary to gather tax returns, paycheck stubs and bank statements of the spouse to explain the financial dealings of the debtor’s household. Sometimes the attorney must gather a sworn statement of the spouse to explain why their income should not be combined with the debtor’s income in the bankruptcy case.
Hiring a Nebraska bankruptcy attorney who can spot the special issues of a non-debtor spouse is key to the success of a case. Cheap bankruptcy attorneys who gloss over these types of issues are rarely cheap in the long-run.