In some instances, it makes sense for individuals to file bankruptcy as a couple. In other situations, it makes more sense to have one spouse filing for bankruptcy. Luckily, bankruptcy law allows spouses to file bankruptcy separately, but it’s impossible to keep a spouse completely “out” of the bankruptcy proceedings. When one spouse is filing for bankruptcy, the other spouse will be required to provide proof of assets and income.
Many who are researching the prospect of filing bankruptcy apart from their spouse are doing so because their “personal” debt is actually in connection to a business. When starting a business, it is not uncommon for an individual to use their own personal credit to provide the start up funding for the company. Some later go on to form an LLC. Forming an LLC for a small business provides tax benefits. Any business losses, profits, expenses, etc. flow through the company to you. Having the LLC in place provides the owner/s with the same liability protections as corporate status. Members of an LLC cannot be held liable for debts unless they have signed a personal guarantee.
This is where our current scenario comes into play. Starting up a business leaves owners with a lot of balls in the air and many end up signing a personal guarantee for debt that is actually business related. When signing a personal guarantee, you state that you agree to be personally liable for the debt regardless of how or why the debts are incurred. You will still be able to write off the expenses associated with maintaining the debts against LLC revenue, but you pledged your own personal assets as collateral and this becomes very important if the day comes when you cannot continue to pay as agreed.
Lenders will usually not take the time to go after the LLC when the owner is personally liable. The majority of LLCs do not hold any assets. The owner holds all the assets and the creditors know this. They know that if there are assets to be had, they belong to the owner of the LLC: a car, a house, personal property, etc. This is what the creditors are looking for once payments stop coming.
If you have signed personal guarantees on business debt, even if you have an LLC in place, filing for the LLC is unnecessary. It would be more effective to file for a personal bankruptcy.
In this situation, the spouse would be required to provide proof of income and assets (even if they are owned separately and not jointly), but they would not need to file for bankruptcy. The court will appoint a bankruptcy trustee to the case whose job it will be to make sure that the household is eligible for bankruptcy protection (even though only one person in the household is filing for bankruptcy). The only repercussion the non-filing spouse should see is notifications on their credit report in relation to any jointly held loans. If this is the situation, the petitioner can file a document while the bankruptcy is still active that could protect the spouse’s credit.
For additional information contact Westgate Law, your southern California bankruptcy experts.