The only situation in which debtors can file a joint New York bankruptcy case is when they are married (to each other). Debtors can only create joint cases by filing together simultaneously. Debtors may not join spouses after they have filed their individual cases. What happens, though, when debtors in a joint case no longer want to be in a joint case? The answer is they would need to sever or deconsolidate their bankruptcy cases.
Severing joint cases does not explicitly appear in the Bankruptcy Code, but it is allowed on motion by the debtors. The reason bankruptcy courts allow severing is that the statute permitting joint cases comes with a quirk: Even though both spouses are filing in the same case, they each get their own bankruptcy estate. Section 302(b) of the Bankruptcy Code gives the bankruptcy court the authority to “determine the extent … to which the debtors’ estates shall be consolidated,” meaning each debtor has his or her own estate. The bankruptcy court hears the motion and then decides whether severing the case is warranted.
Why would married debtors want to sever their joint case? The answer is almost always divorce, especially when the partners have filed in chapter 13. In a joint chapter 13 case, the court confirms one payment plan, which goes into one pool that only one trustee distributes to the creditors. Thus the point of joint bankruptcies is not to give married couples special bankruptcy rights but to reduce the administrative inconvenience of managing two cases that are essentially one. If the parties plan to divorce, then it no longer makes sense to manage the case as one entity, and deconsolidation will probably help both partners.
A less notable situation in which a joint case might need to be severed is when debtors in a chapter 13 case realize that the chapter does not work for them or they are ineligible. Here, one spouse is severed and may convert his or her case to chapter 7, and the other one dismisses the chapter 13 case. The goal is to keep the opportunity for a discharge for at least one of the spouses.
Importantly, if the couple in the joint case is represented by one New York bankruptcy lawyer, then both partners will need to agree to sever the case. This can be exceptionally problematic if one of the partners refuses to make the plan payments or has absconded. Lawyers representing clients jointly cannot allow conflicts of interest, even if one of the parties is clearly misbehaving. The spouse who wishes to sever the case may need to hire separate counsel to represent his or her interests in the bankruptcy case to file the motion, if getting the case dismissed altogether isn’t an option.
After the case is severed, the spouses can either proceed separately, convert to another chapter, or dismiss their own cases. The newly severed case receives a new case number and is considered filed as of the date of the original case. Beware that some creditors might consider the severed case as a second bankruptcy for that debtor.
Joint bankruptcies offer many conveniences to spouses, but sometimes the reasons for managing their bankruptcy estates together disappears, and severing the case best achieves the parties’ goals. If you and your spouse are encountering financial difficulties, then consulting with an experienced New York bankruptcy lawyer will help you assess your options.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA
718-855-6840
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