Bankruptcy: Watch out for the Marital Adjustment Deduction

divorce and bankruptcyWhen a person who is married decides to file for bankruptcy, the law permits him or her to do so alone, without requiring both spouses to file.  However, the non-filing spouse’s finances do play part in the filing spouse’s bankruptcy case.  The “means test,” including the “marital adjustment deduction” will be evaluated to determine whether or not the filing spouse qualifies for a Chapter 7 bankruptcy, or to determine the amount the filing spouse will have to pay unsecured creditors in a Chapter 13 bankruptcy.

The Means Test

Even though you may feel that the only way out of your dire financial situation is to file for bankruptcy, a Westchester county bankruptcy lawyer points out that under the strict rules of the bankruptcy code, you may not qualify for a Chapter 7 bankruptcy filing.  In a Chapter 7 bankruptcy,  the debtor essentially tells the court that he or she is unable to pay back any part of the debt owed to creditors.  In order to qualify, you must pass a “means test,” meaning that your disposable income must be below a certain level.  If you do not pass the means test, then under bankruptcy law you are presumed able to pay back at least a minimum amount of your debt, and you will not be permitted to proceed with a Chapter 7 bankruptcy.  As part of the means test the bankruptcy court will look at your last 6 months of income as well as your expenses.  Thus, even if you have a high income, if your expenses are also high, your may still qualify for a Chapter 7 bankruptcy.

If you are married, but separated and living in separate households, the income of your non-filing spouse will not be taken into consideration for the means test. However, if you are married, then your spouse’s income will be taken into consideration for the means test.  This could have a significant impact on the filing spouses’ Chapter 7 petition.  If the non-filing spouse’s income is too high, then you may not qualify for a Chapter 7 bankruptcy.  In this is so then the “marital adjustment deduction” may help.

The Marital Adjustment Deduction

As part of the means test, you are permitted to deduct expenses from your income.  The “Marital Adjustment Deduction” allows you to deduct any expenses that your spouse pays that are not normal household expenses.  These “other” expenses are known as “marital deduction expenses.”  Examples of marital deduction expenses can include credit card payments for accounts that are only in your spouses’ name, child support payment for your spouse’s child, business expenses, student loan payments, and payroll deductions.  The net result of using the marital adjustment deduction is that if significant, it may offset at least some of your spouse’s income that you had to include in the means test.  Thus, you may still be able to qualify for a Chapter 7 bankruptcy even though your spouse’s income is relatively high.

Alternative to Chapter 7

If after applying the marital adjustment deduction you still do not qualify for a Chapter 7 bankruptcy, you may be permitted to file under Chapter 13. While all of your debt will not be discharged, the total amount you repay your creditors will likely be significantly reduced and you will have 3-5 years to make the payments.   However, you will still have to disclose your spouse’s income and expenses, which may affect the total amount you have to repay your creditors.

The importance of Full Disclosure

Ultimately, both your complete financial picture and that of your spouse will likely be closely reviewed by the bankruptcy court to determine how the law will allow you to proceed with your bankruptcy.  Thus, it is important to be prepared with evidence backing up all claims regarding income and expenses, or risk having your case dismissed.  An even worse result would be having the bankruptcy court determine that you have committed or attempted to commit fraud.

Do you think it is fair that a non-filing spouse’s finances are considered when a married person files for bankruptcy?  What if throughout the marriage the couple’s finances remained largely separate?  Does this rule encourage spouses to legally separate or “pretend” to separate?

Andrew Miller
Andrew Miller is an experienced Social Media expert and Author. He has worked in marketing for over a decade and finds his passion in bringing concepts to life for the world to enjoy. He is also an avid legal blogger and currently working on a book with his wife about social entrepreneurship. He is a true Socialpreneur and finds that his goal in life is to be an agent for positive social change through both his writing and business endeavors.

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Andrew Miller

Andrew Miller is an experienced Social Media expert and Author. He has worked in marketing for over a decade and finds his passion in bringing concepts to life for the world to enjoy. He is also an avid legal blogger and currently working on a book with his wife about social entrepreneurship. He is a true Socialpreneur and finds that his goal in life is to be an agent for positive social change through both his writing and business endeavors.

One thought on “Bankruptcy: Watch out for the Marital Adjustment Deduction”

  1. Nice Post here, A good debt management company will offer you professional advice on the best course of action for you to take, be that a debt management plan, an individual voluntary arrangement (IVA) or even bankruptcy

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