Bankcrupty Chapter 7 text on Document form and Gavel isolated on office desk.

Thinking about divorce you say?  You really need a fresh start–not just relationship wise but financially, too. You wonder whether you can (and should) file for Chapter 7 bankruptcy without your spouse first, as well as what that means for the primary residence you own together in New York.  The short answer is yes, you can file without your spouse but, whether you should do so before, during or after dissolution of the marriage depends on your specific financial circumstance and the laws that will apply in your jurisdiction. This blog article is only meant to provide a general overview of a few things you should know at the outset.  You should consult with legal counsel before starting either process to determine which makes the most sense for you.

As a general matter, Chapter 7 bankruptcy allows you to discharge unsecured debts.  However, in order to qualify for filing a petition under Chapter 7 of the Bankruptcy Code, you must fall below a certain income threshold (a/k/a the “means test”).  Assuming you qualify, some of your assets, such as your home, may be liquidated if you are unable to, for example, protect them using allowable state or Federal exemptions.

With respect to the primary residence you own with your anticipated ex-spouse in New York, first consider the nature of your ownership interest.  Do you own the home as joint tenants with rights of survivorship, as tenants in common, or as tenants by the entirety?  If the deed does not reflect specific language, the general rule is that if the property was purchased during the marriage and a divorce has not occurred, New York law dictates that the property is held as tenants by the entirety.

Second, keep in mind that as of the date a Chapter 7 bankruptcy case is commenced, if you (as the solo filing spouse) have an undivided interest in the real property (tenancy by the entirety, joint tenancy, or tenancy in common), the trustee may sell both the estate’s interest (a/k/a your interest) and that of the non-debtor co-owner’s interest in the property.

Third, whether or not the trustee sells the home depends on several factors, including the value of the property (not the original purchase price of the home), mortgages and other liens encumbering the property, and homestead exemptions. There are different exemptions under New York State law and Federal law. Which exemptions to take depends on your specific circumstances. As of April 1, 2021, if only one spouse files, the allowable New York State exemption is $89,975, which is higher in some counties. For example, for real property located in Nassau County and Suffolk County, the homestead exemption is $179,975.

However, if a married couple files together, the exemption doubles provided they both own the property.

Also, keep in mind that under section 363(h) of the Bankruptcy Code, a trustee may sell such interests only if:

  • partition of the property is impracticable; and
  • sale of the bankruptcy estate’s undivided interest in the property would realize significantly less for the estate than sale of the property free of the non-filing co-owner’s interest; and
  • the benefit to the bankruptcy estate of a sale of the property free of the co-owner’s interest outweighs any detriment to the co-owners.

Ultimately, filing a Chapter 7 bankruptcy petition jointly with your spouse (assuming you fall below the income requirement for Chapter 7), may allow you and your spouse to take advantage of certain homestead exemptions when you both own the marital home.  Also, if you file for bankruptcy first, the division of assets that needs to happen during the divorce process could become simplified.

Bankruptcy is a unique area of law for which individuals should get detailed legal advice and counsel. The material provided in this blog is meant only to provide general information and is not a substitute nor is it legal advice to you.  Readers of this article should seek specific legal advice from legal counsel of their choice.  You can reach Sophia Perna-Plank at spernaplank@jaspanllp.com or (516) 393-8270 or Marissa Pullano at mpullano@jaspanllp.com or (516) 393-8297.