You need to file bankruptcy, but you are married.
Perhaps you’re recently married, or maybe you’ve been married for a while.
Either way, your spouse does not want to file bankruptcy with you and you don’t want them to be affected by your bankruptcy filing.
Can this be accomplished? Must you file a bankruptcy together, or not at all?
Bankruptcy Can Always Be Filed Alone
The Bankruptcy Laws allow married persons to file a joint bankruptcy petition, but they are not required to. You are allowed to file a bankruptcy by yourself and discharge whatever debts you can discharge.
Effect of Bankruptcy on Spouse’s Credit Report
When clients ask me if their spouse will be “affected” they are usually referring to the spouse’s credit.
Technically, in community property states, the bankruptcy of one spouse can indirectly affect the non-filing spouse’s credit, but not usually.
In California, a community property state, community property is liable for all debts of the marital community. What this essentially means is that as long as you’re married, you’re each liable for the debts of the other spouse.
But a bankruptcy filing by one spouse should not affect the credit of the other spouse because that spouse did not file bankruptcy. The nonpayment of the debts may affect the non-filing spouse’s credit, but that is true regardless of whether or not a bankruptcy is filed.
In reality, this usually only occurs in situations where there are joint credit cards or accounts. Otherwise, if the debt is solely in the spouse’s name who is filing for bankruptcy, the creditor will likely not even know the other spouse exists.
If you’ve been married a long time, the risk of joint debts affecting each others’ credit increases.
Married yesterday? Not as big of a problem.
Spouse’s Income and Community Assets Get “Included”
If you are married in a community property state, all income earned by either spouse belongs to the “marital community”.
In other words, my income is your income and vice versa.
Thus, when you file a bankruptcy case the non-filing spouse’s income is used in determining the budget for the household and, hence, eligibility to file Chapter 7 (or how much the payment will be in a Chapter 11 or Chapter 13).
This is true for all states. See my prior article on spouse income in bankruptcy.
Any community property assets–that is, those acquired during the marriage–are part of the bankruptcy estate. Whether or not those assets are at risk depend on their value, which bankruptcy chapter is being filed, and what exemptions are available under applicable state or federal law.
If your spouse has their own separate property–essentially property they owned prior to the marriage which has not been improved using community funds–those assets would not be part of the bankruptcy.
The Community Discharge In Bankruptcy
One of the great benefits of filing bankruptcy alone when married in a community property state is that once you receive your discharge of debts, creditors are prohibited from collecting against any community property assets.
Thus, if one spouse files bankruptcy and gets a discharge in California, the other spouse is protected by that discharge as to their community assets. As long as they remain married, the community assets are safe.
This is a very powerful tool in many cases!
So, Will Bankruptcy Affect My Spouse?
As you can see, whether or not filing bankruptcy will affect the non-filing spouse is a tricky question to answer. In community property states there is usually no difference because all community property gets included, but that does not mean the non-filing spouse will encounter any negative effects. Usually there are no negative effects.
As with all things bankruptcy, having a consultation with an experienced bankruptcy attorney will provide the answers to these questions in your specific situation.
Photo by Larry1732