Q: Will filing a bankruptcy affect my spouse or significant other?
Yes and no. It could potentially affect your spouse if you both share joint debt but only one spouse files a bankruptcy. The bankruptcy will discharge the debtor’s debt only, it will not discharge non-filing individual’s debts. The creditor still may pursue collection activities against the non-filing spouse. However, assuming that the filing spouse’s debts are his, and his alone, then, no, a bankruptcy should not affect the non-filing spouse.

Q: Does my spouse need to file with me?
Yes.  If you are married, there is no requirement that both spouses file or sign the petition.  In a community property state like Arizona it may also be possible to get a community discharge discharging the debts of both spouses while only one files.  If the non-filing spouse has non-community debt, that debt will not be discharged.

Additionally, if the non-filing spouse does not pay his or her obligations relying on the filing spouse’s discharge the creditor is likely to report the status of the unpaid debt as discharged in bankruptcy thereby affecting the credit of the non-filing spouse as much as if he or she had simply filed to begin with.  In a worse scenario, the creditor might even sue the non-filing spouse and attempt to collect the debt forcing the non-filing spouse to explain community discharge to a county justice that might not have gone to law school and cannot grasp the concept.

If you are going to file bankruptcy, if at all possible, it is in your best interest to have both spouses file the petition to clear up any misinformation or lingering debt questions.  Talk to your bankruptcy attorney about the positive and negative aspects of joint filing.

Q: What happens to my 401(k)?
It is likely safe.  Each state has a list of exemptions that are used in the bankruptcy filing process.  These exemptions, at least in Arizona, are based on state law.  There are certain exceptions where federal exemptions could be argued, but for the most part everyone who has lived in Arizona for an appreciable amount of time will use the Arizona bankruptcy exemptions.

The Arizona bankruptcy exemptions are based on Arizona Revised Statutes and can be found in the Arizona code.  One of the Arizona bankruptcy exemptions will protect your 401(k).  Since it is classified as an exemption, it is exempt from the execution by the trustee and essentially exempt from the bankruptcy process.  There are many notable exceptions such as transferring money into the account right before filing or in an attempt to defraud creditors and you want to talk to your bankruptcy attorney about these potential pitfalls.

With proper advice from your bankruptcy lawyer your retirement account will be safe.

Q: How can I get rid of my second mortgage?
Clients are always interested in avoiding junior liens against their residence(s). A debtor first needs to file a Chapter 13 bankruptcy to strip or avoid any junior mortgages/liens from his or her residence, as this procedure is not available to debtors considering filing a Chapter 7. Secondly, the debtor needs to obtain a credible appraisal on the residence. The debtor can then strip off junior mortgages as long as the appraised value of the residence does not exceed the current principal balance owed on the first mortgage held against the residence.

So for example, Debtor’s home has 2 mortgages. The balance on the first mortgage is approximately $200,000. The balance on the second mortgage is $50,000. Debtor receives an appraisal on his home and it values the home at $175,000. In this scenario, Debtor may be able to strip off his second mortgage, thereby removing the $50,000 as a secured debt against the property and legally considering it a $50,000 unsecured debt (similar to credit card debts or medical bills.)

Example 2: Debtor’s home has 2 mortgages. The balance on the first mortgage is approximately $200,000, and the balance on the second mortgage is $50,000. However, Debtor receives an appraisal on his home and it values the home at $225,000. In this scenario, Debtor may not be able to strip off his second mortgage because the value of the home exceeds the principal balance on the first mortgage. The second mortgage holder has, theoretically, $25,000 equity in the home.

Q: How does filing a bankruptcy impact my life?
Filing a bankruptcy, whether it is a Ch. 7 or a Ch. 13, should not be taken lightly. There are consequences involved in filing a bankruptcy. One of the most noticeable consequences is that a bankruptcy will last on your credit report for several years (10 years if you file a Ch. 7 and 7 years if you file a Ch. 13.) While the bankruptcy will be reported for that full duration, the bankruptcy alone will not negatively impact your credit score for that entire timeframe. Usually, a bankruptcy will only negatively impact your credit score for approximately 1 to 2 years after filing. During that 2 year timeframe, a debtor should be able to reestablish his credit to a level that is at least as high as it was prior to filing, if not better.

Further, a debtor may find it difficult to receive credit immediately after filing a bankruptcy. However, the idea of a bankruptcy is to afford a debtor a “freshstart” from his debts and certain obligations. Creditors understand this and may or may not extend credit for a period of time after a debtor filed his bankruptcy. But this is not necessarily a bad consequence, as debtors assuredly will not want to reestablish bad habits of credit card abuse (one of the reasons that may have drove him into filing a bankruptcy in the first place.)