You Don't Lose Everything in a New York Bankruptcy
Clearing up misconceptions on how personal bankruptcy affects your family
on September 21, 2021
When most people hear the word “bankruptcy,” they think it means you have to start over with nothing.
“People have preconceptions of what bankruptcy is. They don’t know what they can keep, or how it will impact them,” says Jeffrey B. Peltz, who practices bankruptcy and matrimonial law in Brooklyn. “The truth is most people don’t lose anything because of exemptions that protect most property, and exemptions are pretty generous in New York.”
The same goes for fears about how it will affect loved ones.
“People often ask me, ‘How will this affect my spouse?’ And I spend a lot of time reassuring them that they’re not going to be affected,” says Michael A. Koplen with Koplen Law. “Sometimes people are afraid that if their spouse files bankruptcy, it’s going to ruin their credit rating. That’s an urban myth. I’ve done about 800 bankruptcies, and every time we run a credit report prior to filing—which shows their credit score as it is, and as it will be after the filing. Sometimes their credit score goes up, because they got rid of a lot of debt, and that was holding the credit score down.”
Individuals commonly file either a Chapter 7 or Chapter 13 bankruptcy. A Chapter 7 is known as a liquidation, because you sell some property to pay back creditors. A Chapter 13 is known as a reorganization, because you keep your property while paying back creditors. They have different timelines and eligibility requirements, but one thing they have in common is the minimal impact on other household members.
“In Chapter 13, a co-debtor is protected for the period of the plan, which is usually three to five years, along with the debtor,” says Koplen. “So let’s say a man and a woman are married, the man files bankruptcy, and the two of them have $100,000 in credit card debt. Now the man/debtor’s obligation to repay the credit card will be changed by the bankruptcy. It’ll either be all discharged at the end, or he’ll pay some percentage of his debt over the term of the plan. But for the entire term of the plan, his wife, who might be a co-debtor on his credit cards, is protected. That’s one of the beauties of a Chapter 13 bankruptcy: Not only does the debtor get the benefit of the bankruptcy, but the co-debtor, anybody who’s also obligated on the loan, is protected for the term of the bankruptcy.”
The only way it tangibly involves a spouse is in the information that is filed to the bankruptcy court in order to qualify.
“In a Chapter 7, they look at the household income, so they will look at the income of the non-filing spouse,” Peltz says. “It comes up all the time where a client wants to file bankruptcy and their spouse doesn’t want to provide paystubs to calculate income for the household. Then I have to convince them that it doesn’t have an effect on them. The bankruptcy court wants to know household size and income. That’s how they determine if someone is eligible for bankruptcy. If you don’t provide that information, it’s difficult to convince the court that you qualify.”
Strained relationships, perhaps motivated by financial troubles, can complicate this discussion. “If the spouses aren’t living together, in the same apartment or household, I don’t need that information,” Peltz says. “So, on rare occasions, a spouse will say, ‘I’ll move out so you don’t need the income.’ I’ll say, ‘You can’t lie about this. You really need to be separate and apart. There’s no required timeframe, so you could move out the month before, but you have to stay that way. You can’t just say that, because lying would be a crime if they investigate.’”
A bankruptcy filing has even fewer implications for children. “Even if you have adult children who are working and living at home, and their incomes are separate, I usually leave them out of the picture,” Peltz says.
So does it ever make sense to file for bankruptcy together?
“On a simple Chapter 7 where you have a couple both obligated on unsecured debt—say, $30,000 worth of credit cards—they might want to file a joint bankruptcy,” Koplen says. “But let’s say you’re facing a foreclosure and you don’t have money, you can file Chapter 13 bankruptcy to hold off the foreclosure. For five years, the bank cannot foreclose because there’s a bankruptcy in place. Then, when you come out of bankruptcy, often the spouse files, so you have another five years of protection. In cases like that, it makes sense to strategize.”