Marital Adjustment in Bankruptcy Cases
It is not unusual for one spouse to file bankruptcy without the other. This could be for a variety of reasons such as only one spouse has debt, prior filing by one spouse or as I have experienced before one spouse is adamantly opposed to filing bankruptcy period.
Despite the reason for one spouse filing alone, marital adjustment applies to the means test calculation that each debtor has to complete. A marital adjustment is a reduction of the household’s income by the non-filing spouses expenses to the extent the filing spouse does not derive a benefit from them. For example, taxes paid by non-filing spouse is one expense that can be deducted through the marital adjustment.
As you can see, the marital adjustment is critical because a spouse filing alone still has to include the income of the non-filing spouse to determine what is known as the current monthly income or CMI.
The CMI determines whether one is eligible for a chapter 7 discharge or has too high an amount to bump them to a chapter 13 filing. Therefore, a marital adjustment will reduce the monthly income making it easier to qualify for a chapter 7 or at least reduce the CMI. The CMI in chapter 13 determines how much you pay as your plan payment therefore the lower the figure the better it is for a debtor with unsecured dischargeable debts
Generally speaking, the bankruptcy code tells us that marital adjustments on apply to expenses the non-filing spouse incurs that do not benefit your household. The examples of these things include:
- Support payments- Child Support and Alimony. Clearly this is money leaving the household to a third party.
- Non-filing spouse’s debt payments – Sole debts from student loans, credit cards or personal loans. Even though the US Trustee, the body entrusted to ensured the integrity of the bankruptcy process by the government, has indicated that credit cards bill used to pay household expenses may not be deducted.
- Retirement account contributions – 401k, 403b, plan loans, IRA contributions
- Activities and habits of the non-filing spouse – Could be as minor as smoking, drinking, gym memberships, gun range memberships, pool club etc. You get the idea.
The marital adjustment allows a debtor to accurately capture the income available to pay his or her expenses. For example, while a debtor can deduct support payments there is no line for the non-filing spouse to do so. Hence, the marital adjustments allows the debtor to reflect his or her financial life as it is.
The non-filing spouse is also not required to stop contributing to his or her retirement and the debtor is allowed to reduce the available income by the non-filing spouses contributions. This is in contrast to the fact the debtor cannot deduct his or her own retirement contributions in the means test. Essentially, debtor cannot save money while creditors get nothing.
As you can see, the marital adjustment deductions may have a direct impact on whether you can file a chapter 7 or a chapter 13. Hence, it is important that you consult with a knowledgeable bankruptcy lawyer in your area to evaluate your case.
For questions or comment call 410-849-9529.
This is a general overview of a complex legal topic and is not intended as legal advice. Do not take action before consulting a lawyer.