§ 10.1 — Debtor Must Be an Individual; Spouses Allowed
Revised: April 22, 2016
Congress intended Chapter 13 to be a powerful tool for rehabilitation of a narrow class of debtors. The most basic limitation on Chapter 13 eligibility is that only individuals have access to the chapter. Section 109(e) uses the phrase of art “individual with regular income.”1 Eligibility for other chapters is not limited to “individuals.” For example, “a person” may be a debtor under Chapter 7.2 “Person” is more broadly defined in 11 U.S.C. § 101(41) to include “individual, partnership, and corporation.”3 The use of individual in § 109(e) signals that only humans or natural persons are eligible for Chapter 13 relief.4 Artificial entities—for example, partnerships5 and corporations6 (including LLCs7)—are not eligible for Chapter 13 relief.
Spouses are eligible to file a single Chapter 13 case naming both individuals and paying only one filing fee.8 “Spouse” is not defined by the Bankruptcy Code. If given its ordinary meaning, spouse is likely to be defined to exclude non-marital forms of relationship. Prior to 2013, a few bankruptcy courts allowed same-sex couples to file joint bankruptcy petitions but only when state law recognized the couple as married.9 Sometime in 2011, the United States Department of Justice stopped objecting to joint bankruptcy petitions filed by legally married same-sex couples. When state law did not define marriage to include a same-sex couple, bankruptcy courts generally found the same-sex couple could not file a joint Chapter 13 petition.10
In 2013, the United States Supreme Court invalidated § 3 of the Defense of Marriage Act (DOMA).11 Strong arguments can be made that same-sex couples legally married under state law can file a joint petition under § 302 of the Bankruptcy Code because the couple are recognized as “spouses” under the law of the state in which they were married. As explained by Bankruptcy Judge McGarity in In re Matson,12 choice-of-law principles and Full Faith and Credit considerations compel this outcome:
The Bankruptcy Code is silent as to which state law to apply when determining the validity of a party’s marriage. It is well settled that the validity of a marriage, at least in regard to its formalities, is governed by the law of the place where it is celebrated, rather than by the law of the spouses’ domicile; and the prevailing view in this country is that the law of the place of celebration governs also as regards the capacity of the parties to marry. . . . The federal government has historically, as well as very recently, relied on the “place of celebration” rule to determine who is married. . . . Reliance on the “place of celebration” rule ensures that married couples do not lose their marital status simply because they travel or relocate across state borders. This recognition continues even in states where the marriage could not have been originally performed. . . . Accordingly, this Court will follow the “place of celebration” rule, requiring the recognition of an out-of-state same-sex marriage as valid, when interpreting the Bankruptcy Code. There is no reason to part from this well settled principle. Furthermore, while the state may not be required to recognize the debtors’ marriage, inasmuch as such marriage conflicts with Wisconsin’s opposition to same-sex marriage, this Court is required under the Full Faith and Credit Act . . . to recognize and apply Iowa’s same-sex marriage law for purposes of federal law. Because the debtors’ marriage was lawful where originally performed, and [United States v. Windsor, 570 U.S. ___, 133 S. Ct. 2675, 186 L. Ed. 2d 808 (June 26, 2013)], invalidated DOMA’s requirement that legal construction of the word “spouse” refer only to opposite-sex couples, they are deemed “spouses” for purposes of the Bankruptcy Code. Consequently, the Code’s requirement that a joint case may only be filed by an individual and the individual’s spouse . . . is satisfied in this case.13
If debtor’s counsel contemplates a joint petition for married individuals, the petition should be filed in both names in the first instance as it has been held that the petition cannot be amended to add a spouse as a copetitioner.14 If one spouse files Chapter 13 and later the other spouse decides to also file, a separate petition and schedules must be filed. If the spouses’ separate estates are essentially identical—the assets, debts and creditors are the same—debtor’s counsel might move under Bankruptcy Rule 1015 to consolidate the two estates.15 Substantive consolidation of cases filed separately by spouses has been denied when consolidation would confuse rather than simplify administration of the two cases.16
The filing of a joint Chapter 13 petition by married individuals does not automatically result in substantive consolidation of the two debtors’ estates.17 As explained in 11 U.S.C. § 302(b), “after the commencement of a joint case, the court shall determine the extent, if any, to which the debtors’ estates shall be consolidated.” It is not routine in Chapter 13 practice for the debtor or trustee to move for substantive consolidation after the filing of a joint petition. Bankruptcy courts do not review every joint Chapter 13 petition filed by spouses to determine whether the estates should be consolidated. Routinely, the joint petition is treated as a single case, and the assets and liabilities are administered as if substantively consolidated. In most Chapter 13 cases, the debts and assets of each spouse will be so similar that substantive consolidation has no adverse effect on creditors. An occasional reported decision reveals a local rule or practice that substantively consolidates jointly filed Chapter 13 cases.18
However, there may be situations in which it is to the advantage of some creditors or to the advantage of one or the other spouse to file a joint petition under Chapter 13 but to administer the estates separately. For example, in one reported decision applying North Carolina law, it was acknowledged that property owned by the entireties was only subject to the claims of creditors of both spouses; thus, husband and wife Chapter 13 debtors could provide one level of payment for their joint debts and a different level of payment for the debts of each separate spouse.19
In Roberts v. Boyajian (In re Roberts),20 one spouse was penalized for failing to ask for separate administration during a Chapter 13 case. Roberts was a husband and wife case in which no order for consolidated administration was entered. With the wife’s knowledge, the husband incurred more than $53,000 of postpetition taxes. When the wife sought a hardship discharge separate from her husband,21 the United States Court of Appeals for the First Circuit cited her “election to proceed, with her husband, under a joint chapter 13 petition and plan”22 as a reason for denying the motion.
This reasoning by the First Circuit is a bit odd. As explained above, the filing of a joint Chapter 13 petition by a husband and wife does not automatically consolidate the estates. Technically, the husband and wife in Roberts were debtors in a joint case, but their estates were not consolidated. By refusing the wife’s application for a separate discharge, the First Circuit signals that some sort of severance or separate administration earlier in the case was necessary to insulate the “innocent” spouse from her misbehaving husband. Bankruptcy Rule 1015 proceeds from the opposite assumption.
It might be in the interests of some creditors to oppose substantive consolidation of jointly filed estates if one spouse has significant debts that are not joint debts—from a failed business, for example—or if one spouse has assets that are not subject to the claims of all creditors. There is little guidance in the reported cases concerning separate administration of jointly filed Chapter 13 estates. It is possible that separate plans might have to be filed. On unusual facts, one spouse in a jointly filed Chapter 7 case that was not substantively consolidated was permitted to convert to Chapter 13 after the death of her husband, to manage her substantial separate assets as the beneficiary of life insurance policies.23
Whether the estates of jointly filing spouses have been substantively consolidated could impact the later dismissal or conversion of one debtor’s case. As the bankruptcy court recognized in In re Fernandes,24 because § 302 does not automatically consolidate estates when a joint Chapter 13 petition is filed, and because debtors have an absolute right to dismiss under § 1307(g), one debtor in a joint case can dismiss notwithstanding that the other spouse’s case continues. When the Chapter 13 estates of jointly filing spouses have been substantively consolidated, it is necessary to separate the estates upon the motion of one spouse seeking dismissal or conversion, which has been called “deconsolidation.”25 Severance or deconsolidation of spouses in a joint case has been allowed when one spouse desired conversion to Chapter 7 and the other spouse wished to continue in Chapter 13.26 Splitting a joint case and allowing one spouse to continue in Chapter 13 has been used as a remedy when the spouses together have aggregate debt that exceeds the debt limits for a Chapter 13 case.27
Oddly, there have been several attempted “mother and son” joint Chapter 13 petitions.28 Obviously, mother and son are not “spouses” and are not eligible to file a joint bankruptcy petition. A mother and son could file separate Chapter 13 petitions and pay separate filing fees, and the court could then consider upon proper motion whether to jointly administer the two cases. The sample is small, but the usual remedy seems to be dismissal of the mother’s case while the son’s case continues to accomplish whatever goals the family actually intended.29
Not all individuals are eligible for Chapter 13 relief. Section 109(e) specifically excludes an individual who is a stockbroker or commodity broker. Stockbroker and commodity broker are carefully defined by the Bankruptcy Code.30 An individual employed by a stockbroker or commodity broker is eligible for Chapter 13 relief though that individual’s employer would not be eligible.31 The Chapter 13 eligibility of individuals who do business in securities has sometimes turned on whether there were customers for purposes of the bankruptcy definition of a stockbroker.32
1 11 U.S.C. § 109(e).
2 11 U.S.C. § 109(b).
3 See In re Vitale, No. 6:07-bk-04042-ABB, 2007 WL 4874785, at *1 (Bankr. M.D. Fla. Nov. 16, 2007) (unpublished) (Briskman) (Because a “fiction” is not a “person” under § 101(41), case is dismissed for lack of eligibility when debtor testified that he was “primary paramount creditor of the debtor” and that “the debtor is a fiction.”).
4 See In re JAC Family Found., 356 B.R. 554, 556 (Bankr. N.D. Ga. Sept. 26, 2006) (Bihary) (“The plain meaning of individual [i]s a ‘single human being’ or ‘natural person’ as opposed to a group. . . . Chapter 13 was enacted to assist natural persons.”).
6 See § 10.3 Corporations Are Not Eligible. See, e.g., Brian v. Flickinger (In re Flickinger), No. 1:10-ap-00049, 2010 WL 3431659 (Bankr. M.D. Pa. Aug. 30, 2010) (unpublished) (France) (Corporate entity is not eligible to be debtor under § 109(e). Dischargeability complaint concerning corporate entity was dismissed. Court had no jurisdiction to determine dischargeability of debts owed by corporate defendant.).
7 See § 10.3 Corporations Are Not Eligible. See, e.g., In re McCormick, 381 B.R. 594 (Bankr. S.D.N.Y. Feb. 8, 2008) (Morris) (Since only individuals are eligible for Chapter 13, debtor could not extend benefit of automatic stay to wholly owned limited liability company. Limited liability company is not eligible for Chapter 13.).
8 11 U.S.C. § 109(e).
9 See, e.g., In re Balas, 449 B.R. 567, 567, 575–79 (Bankr. C.D. Cal. June 13, 2011) (Donovan) (Same-sex debtors legally married in California and domiciled in California could file joint petition as spouses under § 302(a). “[N]o legally married couple should be entitled to fewer bankruptcy rights than any other legally married couple. . . . [T]he court . . . discerns no valid, defensible governmental interest advanced by dismissing the Debtors’ bankruptcy case or requiring, as the Motion to Dismiss suggests, that the Debtors consent [under the duress of DOMA] to ‘voluntarily sever their joint petition by a date certain.’ . . . DOMA violates [debtors’] equal protection rights afforded under the Fifth Amendment of the United States Constitution, either under heightened scrutiny or under rational basis review. . . . Debtors satisfy every legal requirement to pursue their joint petition as filed pursuant to § 302(a).”).
10 See, e.g., Bone v. Allen (In re Allen), 186 B.R. 769, 773–74 (Bankr. N.D. Ga. Oct. 3, 1995) (Kahn) (A same-sex couple is not eligible to file a joint Chapter 13 petition because “spouse” in the Bankruptcy Code means legally married, and the State of Georgia does not recognize same-sex couples as legally married. “[I]f a state recognizes a legal marriage between a same sex couple, they would qualify for relief under § 302 of the Bankruptcy Code. . . . [W]hat is controlling is the fact that the parties are legally married. It is not limited to legally married husbands and wives. . . . [T]o qualify to file a joint petition under § 302 of the Bankruptcy Code, the two parties must be legally married. This applies to both heterosexual and homosexual couples. Therefore, there is no violation of the Debtors’ constitutional rights.”).
11 United States v. Windsor, 570 U.S. ___, 133 S. Ct. 2675, 186 L. Ed. 2d 808 (June 26, 2013).
12 509 B.R. 860 (Bankr. E.D. Wis. Apr. 29, 2014) (McGarity).
13 In re Matson, 509 B. R. at 863–64.
14 Olson-Ioane v. Derham-Burk (In re Olson-Ioane), 253 B.R. 73, 74–75 (B.A.P. 9th Cir. Aug. 29, 2000) (Klein, Russell, Marlar) (Debtor cannot amend petition one year after filing to add spouse as a codebtor. “[J]oint cases are to be commenced by the filing of a ‘single petition’ by an individual and that individual’s spouse. 11 U.S.C. § 302(a). Thereafter, the court is to determine the extent to which the estates are to be consolidated. 11 U.S.C. § 302(b). There is, by rule of procedure, a general right to amend a voluntary petition ‘as a matter of course at any time before the case is closed.’ Fed. R. Bankr. P. 1009(a). The question becomes whether such an amendment to a voluntary petition satisfies the ‘single petition’ requirement of § 302. We conclude that it does not.”); In re Daly, No. 07-22628-13, 2008 WL 276538 (Bankr. D. Kan. Jan. 30, 2008) (unpublished) (Somers) (Because § 302 does not authorize joint petitions filed on different dates, when one spouse filed individually and later attempted to add other spouse as codebtor, amended petition is nullity. Amended petition did not commence case for spouse. Joint petitions constitute two separate estates unless substantively consolidated.); In re Kilgore, No. 04-90855, 2004 WL 5848036, at *1 (Bankr. N.D. Ga. Mar. 19, 2004) (unpublished) (Massey) (One spouse may not amend Chapter 13 petition to add other spouse as joint debtor; spouse may file separate case and then move to have cases jointly administered. “That would be the equivalent of having a joint case, because in a joint case, there are two distinct bankruptcy estates being administered under one case number.” Clerk’s mistake in adding spouse to caption of case as joint debtor must be corrected by deletion of wife’s name as joint debtor.); In re Buerman, 295 B.R. 876, 876 (Bankr. W.D. Ark. July 23, 2003) (Taylor) (“‘[N]othing in section 302 suggests that a debtor may amend a petition to add a spouse as a debtor and thereby retroactively commence a case for that spouse.’”); In re Perkins, 51 B.R. 272 (Bankr. D.D.C. Oct. 26, 1984) (Bason). See In re Kirkus, 97 B.R. 675 (Bankr. N.D. Ga. Aug. 13, 1987) (Cotton) (Chapter 13 debtor cannot add a spouse as a copetitioner at conversion of the Chapter 13 case to Chapter 7.).
15 See Olson-Ioane v. Derham-Burk (In re Olson-Ioane), 253 B.R. 73, 75 (B.A.P. 9th Cir. Aug. 29, 2000) (Klein, Russell, Marlar) (“[T]here is a straightforward procedure for permitting belated bankruptcy relief to a non-filing spouse. That individual is free to commence a voluntary case and then seek joint administration of the two related cases involving husband and wife as provided by Federal Rule of Bankruptcy Procedure 1015(b)(1).”); In re Buerman, 295 B.R. 876 (Bankr. W.D. Ark. 2003) (Citing Olson-Ioane v. Derham-Burk (In re Olson-Ioane), 253 B.R. 73 (B.A.P. 9th Cir. Aug. 29, 2000) (Klein, Russell, Marlar), filing a second voluntary case and then seeking joint administration under Bankruptcy Rule 1015(b)(1) is the solution for a belated filing by a spouse.); In re Young, 61 B.R. 150 (Bankr. S.D. Ind. May 14, 1986) (Bayt) (Separate spouses’ petitions are consolidated into a single case.).
16 See, e.g., In re Sarner, No. 10-17487-JNF, 2010 WL 3282589, at *5 (Bankr. D. Mass. Aug. 19, 2010) (unpublished) (Feeney) (Substantive consolidation of separate spouses’ cases was denied when one spouse was not eligible for Chapter 13 discharge and different claim bar dates would prejudice creditors. Use of claim bar date in first-filed case would violate due process rights of creditors in later-filed case. Consolidation would not benefit all creditors and would harm some. Debtor’s financial affairs, although similar to spouse’s, were not so complex as to warrant substantive consolidation. “The existence of two bar dates for proofs of claim and the Debtor’s lack of an entitlement to a discharge in this case because of her Chapter 7 discharge in her prior case compel the conclusion that maintaining separate cases will avoid, rather than ameliorate, confusion among creditors.”).
17 In re Fernandes, 346 B.R. 521, 522 (Bankr. D. Nev. May 10, 2006) (Markell) (“Section 302 does not automatically consolidate estates. Rather, it provides for the coordinated administration of two presumably related cases. . . . [A]n order of joint administration under Section 302 and Bankruptcy Rule 1015 does not mingle or mix the assets or claims of each estate with the other. As a result, the filing of a joint case does not, without more, affect whatever rights creditors . . . have as against either spouse individually.”).
18 See, e.g., In re Shjeflo, 383 B.R. 192 (Bankr. N.D. Okla. Feb. 19, 2008) (Michael) (By local rule, joint filing of spouses resulted in substantive consolidation.).
19 See In re Chandler, 148 B.R. 13 (Bankr. E.D.N.C. Dec. 3, 1992) (Small). See also Raynard v. Rogers (In re Raynard), 354 B.R. 834 (B.A.P. 6th Cir. Oct. 25, 2006) (Aug, Latta, Scott) (Because individual creditors have no rights against entireties property under Michigan law, not unfair discrimination to separately classify joint creditors for more favorable treatment when joint creditors would be paid in full from entireties property in a Chapter 7 case and individual creditors would receive no distribution.).
20 279 F.3d 91 (1st Cir. Feb. 8, 2002) (Torruella, Cyr, Lipez).
22 In re Roberts, 279 F.3d at 93.
23 In re Estrada, 224 B.R. 132 (Bankr. S.D. Cal. Aug. 24, 1998) (Adler).
24 See, e.g., In re Fernandes, 346 B.R. 521 (Bankr. D. Nev. May 10, 2006) (Markell) (Because § 302 does not automatically consolidate estates when a joint Chapter 13 petition is filed, and because debtors have absolute right to dismiss under § 1307(b), one debtor in a joint case can dismiss notwithstanding that joint debtor spouse continues.).
25 See In re Shjeflo, 383 B.R. 192 (Bankr. N.D. Okla. Feb. 19, 2008) (Michael) (On motion of one spouse for severance of jointly filed case, over objection of trustee, court deconsolidated estates under authority of § 105(a), Bankruptcy Rule 7021 and Federal Rule of Civil Procedure 21.).
26 In re Seligman, 417 B.R. 171 (Bankr. E.D.N.Y. Aug. 28, 2009) (Trust) (When one spouse desired conversion to Chapter 7 but other spouse wanted to remain in Chapter 13, severance of cases that had not been consolidated was appropriate; to deny severance and conversion to one debtor would lead to inequitable result.).
27 See, e.g., In re Butler, No. 10-00317, 2010 WL 2035373 (Bankr. D.D.C. May 21, 2010) (unpublished) (Teel) (Although aggregate debt of spouses exceeded limits in § 109(e), when one spouse wished to convert to Chapter 7, severance of joint case was allowed, and one spouse remained in Chapter 13 within debt limitations.); In re Kevitch, No. 04-32127F, 2006 WL 6627818, at *3 (Bankr. E.D. Pa. Feb. 8, 2006) (unpublished) (Fox) (In joint case, when husband exceeded debt limitations for Chapter 13, case was bifurcated—wife remained in Chapter 13; husband's case converted to Chapter 7. Bifurcating joint petition into two individual cases recognized reality that joint petition was always two separate estates, jointly administered. “Accordingly, it follows that when a joint chapter 13 petition is filed and one spouse is ineligible for chapter 13 relief . . . the chapter 13 case may proceed with only the eligible spouse as the debtor.”).
28 It is probably not worth speculating why there aren’t more mother-daughter, father-daughter or father-son joint petition cases.
29 See, e.g., Stancil v. Bradley Invs., LLC (In re Stancil), 487 B.R. 331 (Bankr. D.D.C. Feb. 25, 2013) (Teel) (Debtor and his mother could not file joint petition, but automatic stay arose on filing. Mother’s petition was dismissed, but son’s case remained, and creditor violated stay in son’s case by foreclosing.), motion to amend denied, No. 12-10006, 2013 WL 1702304 (Bankr. D.D.C. Apr. 19, 2013) (unpublished) (Teel); Stancil v. Bradley Invs., LLC (In re Stancil), 473 B.R. 478, 481 (Bankr. D.D.C. June 19, 2012) (Teel) (Joint case filed by son and mother was improper and was dismissed as to mother. “Such a petition must be treated as commencing separate cases limited to one entity for each such case, with a filing fee to be paid for each case, and with the cases not jointly administered unless the court later orders such joint administration.” Filing triggered automatic stay, barring postpetition foreclosure. Son’s complaint for turnover of foreclosed property survived motion to dismiss.); In re Bartolucci, No. 08-06701-8-JRL, 2008 WL 4820530 (Bankr. E.D.N.C. Oct. 27, 2008) (unpublished) (Leonard) (Mother and son are ineligible to file jointly, but court can drop one party from case under Bankruptcy Rule 7021; mother voluntarily dismissed, and case remains open for son.).
30 See 11 U.S.C. §§ 101(6) (“commodity broker”), 101(53A) (“stockbroker”).
31 In re Schave, 91 B.R. 110 (Bankr. D. Colo. Sept. 22, 1988) (Brumbaugh); In re Berry, 22 B.R. 950 (Bankr. N.D. Ohio Sept. 10, 1982) (White).
32 See, e.g., In re Fassi, No. 12-18655 MER, 2013 WL 2190158 (Bankr. D. Colo. May 21, 2013) (Romero) (Debtors were not ineligible stockbrokers. They did not have customers as defined by § 741(2) or meet § 101(53A) stockbroker definition.); In re Hayter, No. 09-20448-TLM, 2010 WL 1258162 (Bankr. D. Idaho Mar. 26, 2010) (unpublished) (Myers) (Debtor was an ineligible stockbroker because debtor was engaged in business effecting transactions in securities and had customers for purposes of the definition in § 101(53A).).