The Means Test
Your ability to file for Chapter 7 bankruptcy depends on passing the means test. If you earn less than the median income in your state for a family of comparable size, you don't have to take this test -- you're eligible for Chapter 7. If your income is more, you must complete a schedule showing how much money you have left over each month after paying your necessary living expenses. As of 2013, if you have $166 per month or more, you can't file for Chapter 7 liquidation bankruptcy. You must file for Chapter 13 instead, using your extra income to pay off your debts over three or five years in a repayment plan approved by the court. If you file for bankruptcy alone, without your spouse, you must still include her income in the means test. Including your spouse's income may bump you over the $166 per month limit, forcing you to file for Chapter 13.
Effect on Joint Debts
If you and your spouse have a lot of joint debts – accounts you both signed for – filing for Chapter 7 by yourself may not do you much good. Although you would no longer be personally responsible for paying these debts after discharge, your spouse would be left holding the bag if she doesn't file bankruptcy with you. When two people sign for a debt, if one of them can't pay or is no longer legally obligated to do so, the creditor can simply pursue the other for payment. Therefore, money would still be leaving your household every month to pay the debts you discharged. If you file for Chapter 13 bankruptcy instead, your spouse is protected for a little while, during the term of your repayment plan. If you don't pay joint debts in full during the plan, however, the creditors can go after your spouse for payment as soon as you receive your bankruptcy discharge.
Chapter 7 Exemptions
Bankruptcy exemptions are the magic wands that allow you to retain some of your property when you file for Chapter 7. You can apply these exemptions to assets you want to keep, so the trustee can't sell or liquidate them to give the money to your creditors. When spouses file bankruptcy together, these exemptions are typically doubled. For example, if the homestead exemption in your state is $25,000, you could protect $50,000 of equity in your home if you and your spouse file a joint bankruptcy petition. If you file alone, and if a single homestead exemption isn't enough to cover all the equity in your home, the trustee can force the sale of the property, even if your spouse is a co-owner. The trustee can claim your share of the unprotected equity for payment to your creditors.
Community Property States
Community property states do things a little differently and there are nine of them – Arizona, California, New Mexico, Nevada, Texas, Washington, Wisconsin, Idaho and Louisiana. In these states, spouses equally own all assets and equally owe all debts. This blurs the line between joint debts and debts in your sole name. Your marital estate is responsible for all debts taken out during your marriage, even those in your name alone. If you file for bankruptcy, your discharge eliminates your personal responsibility for paying all marital debts, and it relieves the marital community from responsibility for paying them as well. Your creditors could still pursue your spouse's separate property to recoup their losses, however, if she doesn't file for bankruptcy along with you. Separate property includes anything she owned prior to the marriage or received by way of gift or inheritance -- things she owns herself that never became part of the marital community. This happens because, as your spouse, she's responsible for community debts incurred during the marriage.