8th Circuit Forces Married Debtors to Consolidate Bankruptcy Cases
During bankruptcy a debtor must apply legal exemptions to protect property from creditors. The Bankruptcy Code allows the debtor to choose between state and federal exemptions, but also permits states to “opt-out” and force their residents to apply state law exemptions.
A married couple filing bankruptcy faces these same exemption law decisions. However, there is nothing in the Bankruptcy Code that forces a married couple to file bankruptcy jointly. In some cases, separate filing is sound strategy. In other cases, filing separately simply invites further litigation.
The Eighth Circuit Court of Appeals recently decided an interesting case where a married couple filed separate Chapter 7 bankruptcy cases. The husband claimed protection under the federal law exemptions, and the wife claimed Arkansas exemptions to protect her property. In this case the husband was able to take advantage of greater protections under Section 522(d) to exempt his annuities, while his wife applied an Arkansas homestead exemption to protect her debt-free home.
The bankruptcy trustee objected and sought consolidation of the two cases. The trustee argued that the debtors were “stacking” exemptions and should be forced to select one exemption scheme. The debtors responded that they were separated and maintained different households.
The Eighth Circuit was asked whether two lower courts had abused discretion by forcing the consolidation of the cases. It turned to the case of In re Reider, 31 F.3d 1102 (11th Cir. 1994), for guidance and asked two questions: “(1) whether there is a substantial identity between the assets, liabilities, and handling of financial affairs between the debtor spouses; and (2) whether harm will result from permitting or denying consolidation.”
For the first prong, the Circuit Court examined the facts of the case: the two debtors lived separately; wife had no mortgage on her home while husband was surrendering his; they owned separate insurance policies, separate interests in businesses, separate annuities, separate IRAs, and individual credit card debt. On the other hand, the couple shared a checking account, several credit cards, and a leased car. They had jointly withdrawn funds from IRAs on two occasions, they had joint state and federal tax obligations, and were jointly liable on a civil judgment. The Circuit Court found no abuse in the decision that there was substantial identity between the debtors.
For the second prong, the Court found that the lower courts did not abuse discretion by holding that the benefit to creditors outweighed any prejudice the debtors would suffer by consolidating the cases. The Court said, “Stated differently, the bankruptcy court found that if Marilyn were permitted to exempt her home under Arkansas law and Samuel were permitted to exempt his IRAs and annuities under federal law, their separate estates would have significantly less value than if their cases were substantively consolidated and the Boellners were forced to choose either federal or state exemptions.” For more information on this case, see Boellner v. Dowden, No. 14-2816 (8th Cir. May 12, 2015).
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