Tuesday, September 7, 2010

Can a Same-Sex Married Couple File for a Joint Bankruptcy?

UPDATE: On June 26, 2013, the Supreme Court of the United States declared in United States v. Wilson, that section 3 of DOMA (the "defense of marriage act") is unconstitutional.  Read our analysis of what this changes: SCOTUS decision on DOMA affects Joint Bankruptcies


A recent article in The Boston Globe indicated that bankruptcy filings are at an all-time high in Massachusetts (since the 2005 changes to the bankruptcy law went into effect). The reasons are varied: overwhelming debt, bad mortgages, a loss of income, or an effort to avoid foreclosure. These economic realities are blind to the sexual orientation or familial relationships of debtors. A down economy affects us all, whether we are gay or straight.

The U.S. Bankruptcy laws are some of the oldest in our country, predating even the Bill of Rights and, are intended to protect honest people who have experienced difficult financial hardships. Your sexual orientation should not affect how this law protects you, but it does.

Why is the law different for same-sex married couples?

The U.S. Bankruptcy Code is a federal program and is overseen by the U.S. Department of Justice. Although it is administered at a state level and each state has the ability to specify its own procedural rules and an alternate exemption scheme, the Bankruptcy Court applies federal law. Since the Bankruptcy Code applies federal, not state, law, bankruptcy courts are required to follow the requirements of DOMA and refuse to recognize joint bankruptcy filings by same-sex married couples. DOMA, short for the Defense of Marriage Act, is a federal law passed in 1996 that bars federal recognition of same-sex marriage in federal programs.

How is the law different for same-sex married couples?

Under the bankruptcy code, a heterosexual married couple can petition for relief jointly. Debts that are owned by either spouse individually, and/or by both spouses jointly can be discharged under one proceeding. Both debtor-spouses proceed through the bankruptcy process together under the same case, meaning that all conferences and appearances are jointly held with both debtors, and both spouses can count on consistent relief from one bankruptcy court judge and one bankruptcy trustee.

There is also a financial savings to filing jointly. Joint debtors pay only one filing fee for the petition (ranging from $274 to $1,049, depending on the chapter) and usually attorney’s charge less fees for one joint filing then they would for two separate individual filings.

Finally, there is a significant benefit to filing jointly because of how exemptions are calculated. Exemptions, i.e. the amount of property that cannot be taken to pay your debts, doubles for a joint filing, making it possible to protect more assets, regardless of which spouse owns the property.

What is the current law in effect?

Over the years, the bankruptcy court has refused to extend the benefits of a joint filing to same-sex couples. Decisions such as In re Allen, 186 B.R. 769, 773 (Bankr. N.D. Ga. 1995) held that two debtors were ineligible to file a joint bankruptcy petition because they were not legally married. A different court reached a similar result in 2004 with In re Kandu, 315 B.R. 123, 148 (Bankr. W.D. Wash. 2004), where the bankruptcy court, citing DOMA, dismissed a joint chapter 7 petition filed by a lesbian couple validly married in Canada. Despite the fact that they were validly married under Canadian law, the court cited that DOMA restricted marriage to heterosexual couples in the eyes of federal law, including the bankruptcy code, and refused to extend the federal benefits of a joint filing for bankruptcy to the debtors.

What has changed?

In Commonwealth of Massachusetts v. Health and Human Services and Gill v. Office of Personnel Management, the Massachusetts Attorney General and same-sex spouses, respectively, sought relief from the U.S. Court for the District of Massachusetts, requesting that the Court find DOMA unconstitutional for prohibiting the extension of federal benefits to same-sex spouses. The Court concluded that DOMA’s definition of marriage, and its attempts to limit the benefits thereof to heterosexual couples did not constitute a legitimate government interest, and was therefore, unconstitutional. U.S. District Judge for the District of Massachusetts, Joseph Tauro, wrote in the Gill decision: “As irrational prejudice plainly never constitutes a legitimate government interest, this court must hold that Section 3 of DOMA as applied to Plaintiffs violates the equal protection principles embodied in the Fifth Amendment to the United States Constitution.”

Although neither of these cases dealt directly with the federal benefit of joint bankruptcy filing, the door is now open to argue that married same-sex joint debtors may rely on the Court’s decision in Gill, and obtain the same legal and practical benefits of a joint bankruptcy filing.

Despite the court’s recent decision, DOMA is still the law, and we would anticipate that a bankruptcy Trustee would likely move to dismiss any joint filing by a same-sex marriage until there is a case which deals specifically with this issue (or DOMA is repealed). However, given the rationale provided in Gill, we believe a debtor stands a reasonable chance of succeeding before the bankruptcy appellate panel or the U.S. District Court if that specific issue were presented on appeal.

How can we help?

Kelsey & Trask, P.C. understands that not everyone wants to be a constitutional test case, and for some, operating within the restraints of the law, no matter how unfair, is better in the short term than changing the legal thinking of an entire system. We recognize the limitations and restrictions presented by DOMA. While we cannot extend all benefits of a joint filing, we do recognize and support the same-sex community.

If you need assistance in the bankruptcy court, we will not charge you as separate clients; rather, we will charge the same fee as we would any married couple. We will also do our best to ensure your cases are presented to the same trustee, and remain in front of the same Judge, by filing them simultaneously (giving them the best chance to be in front of the same trustee and Judge).

Joint filings were created in order to protect the family unit and allow for collective financial planning. While federal law currently chooses to deny same-sex married couples from such federal benefits, we have chosen to treat same-sex married couples with the same dignity and treatment as their heterosexual counterparts. It is not a perfect solution, but if it helps your family to get a fresh start, we don’t want you to go alone.

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