Filing for bankruptcy is a significant financial decision, and for married couples, it often raises concerns about how the process will impact both spouses.
Whether you file jointly or individually, bankruptcy can have consequences for both partners, especially in situations where debts are shared or in states that follow community property laws.
Understanding how bankruptcy affects your spouse is essential for protecting your household finances and making informed choices.
When you consider bankruptcy, one of the first decisions is whether to file individually or jointly. Both options have different implications for your spouse, depending on how much debt is shared and the specific financial situation.
An experienced bankruptcy attorney can also help you to decide which is best in your situation.
Individual Filing: If only one spouse is primarily responsible for the debts or if the couple wants to protect the other’s credit, the filing spouse may choose to file alone. This means that only the debts and assets of the filing spouse are included in the bankruptcy.
In cases where debts are in both names, individual filing will not relieve the non-filing spouse of their responsibility to repay those debts.
Example: If you have joint credit card debt and you file for bankruptcy individually, the bankruptcy will discharge your responsibility for the debt, but your spouse will still be liable for the full amount.
Joint Filing: A joint bankruptcy filing includes both spouses’ debts and assets in the case. This can simplify the process for couples who have substantial joint debt or live in community property states. However, it also means that both spouses’ credit scores will be impacted, and both will have a bankruptcy on their credit reports for years to come.
Example: If a couple has a large amount of shared debt from a mortgage or joint credit cards, filing jointly can discharge these debts for both individuals, but the long-term impact on credit must be weighed carefully.
Where you live can significantly affect how bankruptcy impacts your spouse. In the United States, property laws differ between community property states and common law states.
Community Property States: In community property states, assets and debts acquired during the marriage are generally considered joint, regardless of whose name is on the debt or asset. This means that even if one spouse files for bankruptcy individually, the non-filing spouse’s assets and income could still be affected.
The nine community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. If you live in one of these states and file for Chapter 7 bankruptcy individually, all community assets may be used to pay off creditors, even if your spouse did not file.
Example: In California, if one spouse files for bankruptcy, the court can use jointly owned assets, like a home or joint bank account, to satisfy debts. This is why it’s important for spouses in community property states to carefully consider filing jointly or separately.
Common Law States: In common law states, only the assets and debts that are in your name or jointly held are affected by bankruptcy. If you file individually, your spouse’s separate assets are usually protected from creditors. However, joint debts can still create complications if your spouse remains liable for repaying them.
Example: In a common law state like Florida, if you file for bankruptcy individually, creditors cannot seize your spouse’s assets that are held solely in their name. However, for any jointly held debt, such as a mortgage, your spouse would still be responsible for repayment.
Joint debts are one of the most important considerations in a bankruptcy filing. If both spouses are co-signers or jointly responsible for debts, the bankruptcy will not relieve the non-filing spouse of their obligation to pay those debts unless you file jointly.
Chapter 7 Bankruptcy: In a Chapter 7 bankruptcy filing, which involves the liquidation of assets, the filing spouse is relieved of responsibility for their debts. However, any joint debts that are not discharged may still be the responsibility of the non-filing spouse. This is particularly common with joint mortgages or credit card debt.
Example: If both spouses have a joint credit card and one files for Chapter 7, the filing spouse is no longer responsible for the debt, but the credit card company may pursue the non-filing spouse for full payment.
Chapter 13 Bankruptcy: In Chapter 13 bankruptcy, you create a repayment plan for your debts over three to five years. If you file individually, the repayment plan may help protect your spouse from immediate collection actions on joint debts, but they are still ultimately responsible for paying their share of the debt.
Example: If one spouse files for Chapter 13 to reorganize debt, joint creditors cannot take collection actions against the non-filing spouse during the repayment period. However, once the repayment plan ends, the non-filing spouse is still legally responsible for any remaining joint debts.
Whether you file individually or jointly, bankruptcy will impact your credit score. However, if only one spouse files, the other’s credit may remain unaffected—unless they are co-signers on the debt.
Individual Filing: Filing individually can preserve the non-filing spouse’s credit score. If your spouse has strong credit and does not need to discharge any debt, it may be wise for them to avoid filing. However, joint debts may still negatively affect their score if they are not repaid.
Example: A spouse with minimal debt or separate finances may avoid filing and protect their credit score, but they must be prepared to manage any joint debts that the bankruptcy does not discharge.
Joint Filing: Filing jointly will affect both spouses’ credit scores. Bankruptcy will stay on both credit reports for seven years in Chapter 13 cases and ten years in Chapter 7 cases. If both spouses have substantial debt, filing jointly might make sense, but the long-term effects on credit should be considered.
In common law states, it’s possible to protect your spouse’s assets by filing individually. Separate property—such as assets acquired before the marriage or gifts given specifically to your spouse—are generally not included in bankruptcy proceedings.
However, this protection may not apply in community property states, where marital assets are considered joint property.
Example: If you inherited money from a family member and deposited it in a separate account, that inheritance may be safe if your spouse files for bankruptcy in a common law state. In a community property state, that inheritance could potentially be used to satisfy joint debts.
Filing for bankruptcy is a major financial decision, especially for married couples. The choice of whether to file individually or jointly depends on factors such as the type of debt, state laws, and your overall financial goals.
In community property states, the lines between individual and joint assets blur, while common law states offer more protection for non-filing spouses. To avoid unintended consequences, it’s critical to consult with a qualified bankruptcy attorney who can guide you through the process and help you make the best choice for both spouses.
By understanding how bankruptcy affects your spouse, you can protect your household finances and move forward with confidence.
Dealing with bankruptcy doesn’t have to be a single-person job. The bankruptcy lawyers at Parker & DuFresne will help you determine the best course of action to help you get out from under your debt and move forward to a debt-free future.
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