An attorney friend called me to ask about a single spouse bankruptcy filing. A single spouse filing is a case in which only one spouse files while the other does not.
The couple owned a home and had significant equity in that home, more than the filing debtor could exempt. Wisconsin’s homestead exemption is $75,000 per spouse.
In this instance there would be about $200,000 of equity. The debtor would be able to claim the $75,000 exemption, leaving $125,000 available for the bankruptcy trustee to distribute to creditors.
The attorney’s thought process was logical. He reasoned that one-half of that $125,000 could be taken by the trustee. This is because Wisconsin is a community property state and spouses each have an undivided one-half interest in most assets.
But logic does not always prevail. Fortunately, the debtor had not yet filed. I advised the attorney that the trustee would be able to take the entire $125,000 which was not claimed exempt. He would be far better off having both spouses join in this particular filing. Then they could each claim a $75,000 homestead exemption, for a total of $150,000.
When a debtor files bankruptcy, all interest in community property go into the bankruptcy estate, not just the one-half interest owned by the debtor. This means that all the equity from the home would have gone into the bankruptcy estate.
But even though all community property interests go into the bankruptcy estate, only the debtor can claim any property as exempt. This means that the non-filing spouse cannot avail him/herself of any exemptions.
Often, only one spouse in a couple wants to file. The reasons for this vary, from indignation when only one spouse has incurred the debt, to trying to retain a better credit score.
But single spouse filings must be approached with great caution. They can prove very costly.