Bankruptcy Issues Same-Sex Couples Face

LGBTQ couples are often concerned about special issues they may face when filing a bankruptcy case. Under U.S. bankruptcy law, those days are largely gone. In this article, we’ll explain how same-sex couples are treated for bankruptcy purposes, how we got here, and what it may mean for you. 

Same-Sex Married Couples Can File Bankruptcy Together

The path to same-sex spouses filing bankruptcy together has been long and somewhat tangled. First, same-sex couples could enter into domestic partnerships, but not marriage. Unlike married couples, domestic partners couldn’t file bankruptcy jointly. As some states began recognizing same-sex marriage rights to address this and other inequalities, the federal government passed the Defense of Marriage Act (DOMA). 

DOMA is best known for allowing states to ignore same-sex marriages established in other states. The statute also barred recognition of same-sex marriages for purposes of federal law. That meant same-sex spouses weren’t eligible for spousal Social Security benefits, couldn’t file joint federal tax returns, and weren’t considered spouses for purposes of family-based immigration. It also meant they couldn’t file a joint bankruptcy petition, even if they were legally married in the state where they lived and filed. 

In 2013, the United States Supreme Court struck down the Defense of Marriage Act as unconstitutional. That ruling meant that same-sex couples who were considered legally married in their state of residence were treated just like heterosexual married couples in bankruptcy. But this didn’t solve the problem for everyone, since many states still didn’t recognize same-sex marriage. 

Two years later, in Obergefell v. Hodges, the Supreme Court ruled that excluding gay and lesbian couples from marriage violated the Equal Protection Clause of the 14th Amendment to the U.S. Constitution. With all 50 U.S. states required to recognize same-sex marriage, the inconsistent treatment in bankruptcy ended. Since 2015, same-sex couples who are legally married have had the option of filing bankruptcy jointly, just as heterosexual couples always have. 

New Obligations for Same-Sex Spouses in Bankruptcy

With the Obergefell decision, same-sex spouses gained the advantage of being able to file bankruptcy jointly. But this change also introduced some burdens and obstacles. For instance, now both spouses’ income is considered for other bankruptcy purposes, like determining household size and calculating household income in the means test. A higher-earning spouse may make it difficult for the spouse filing bankruptcy to pass the Chapter 7 means test. 

Also, for couples who live in community property states, most property acquired during the marriage is considered community property. That’s true even if the non-filing spouse purchased the property solely with their income and the property is only titled to the non-filing spouse. 

What if Spouses are Separated Before Filing Bankruptcy?

If spouses maintain separate households or if they’re legally separated, the filing spouse doesn’t need to include the other spouse’s income when completing the bankruptcy forms. The separation must be real, though. Moving into a separate apartment so you can file bankruptcy separately without including your spouse’s income may be considered fraud.

You Must Be Married to File Bankruptcy Jointly

All legally married couples have the option of filing Chapter 7 or Chapter 13 bankruptcy jointly in every state in the U.S. — couples who aren’t legally married can’t file a joint bankruptcy petition. That’s true for all non-married couples, regardless of the sexual orientation of the partners. Couples who live together but aren’t married can’t file jointly, no matter how long they’ve lived together. Couples who’ve entered into a domestic partnership rather than a legal marriage are also not allowed to file bankruptcy jointly. 

Is it Better To File Bankruptcy Alone or With Your Spouse? 

All married couples can file bankruptcy jointly with their spouse. But should you? 

The answer depends on a variety of factors, including: 

• Whether one spouse is carrying most of the problem debt or if it is joint debt

• Whether you live in a community property state

• Whether one spouse owns separate property that wouldn’t be exempt

• Whether you have reason to preserve one spouse’s credit score

It’s important to make sure you fully understand how filing bankruptcy individually or jointly will play out in your specific situation. For example, if you don’t live in a community property state and you have a lot of joint debt, one spouse filing alone may not solve the problem. If the filing spouse discharges $10,000 in joint credit card debt through a Chapter 7 bankruptcy, the non-filing spouse will remain responsible for that debt. On the other hand, if one spouse owns property separately, a joint filing may put that property at risk unnecessarily. 

Let’s Summarize…

Since 2015, same-sex married couples have been treated just like heterosexual married couples in bankruptcy proceedings. That means a same-sex married couple has the same right to file jointly, as well as the same obligation to list the spouse’s income and any community property for inclusion in the bankruptcy estate. Couples are required to be legally married to file bankruptcy together.

There are pros and cons to filing jointly, and every couple’s situation is different. If you’re married and unsure whether it makes more sense to file individually or with your spouse, you may want to consider speaking with a local bankruptcy lawyer for legal advice. Many bankruptcy attorneys offer free consultations.