Will Declaring Bankruptcy Affect My Spouse?
There are several points that need to be considered when it comes to bankruptcy and your spouse. In some situations, your spouse may be required to file bankruptcy with you. In other cases, your spouse may not need to file at all.
There are cases when your spouse’s credit may be affected, and times when your husband or wife’s credit shouldn’t be affected by the filing of a bankruptcy at all.
The point is that every situation is different, but the key factors that can affect a spouse during bankruptcy include:
- How the assets are titled
- Who owes on the debts
- The income of both spouses
- The laws of your state – mainly, whether you live in a community property state or a state where title to property determines ownership.
- Whether you are filing a Chapter 7 or a Chapter 13 bankruptcy
Community property states
In community property states, both spouses have a claim to any property that is titled in the name of one or both spouses.
This means the property of either spouse can be used by the creditor or the trustee in bankruptcy to satisfy any debts.
This is primarily an issue in Chapter 7 filings where the trustee will look to seize any assets that can’t be exempted and then sell those assets.
The benefits
One small benefit is that if both spouses file for bankruptcy, they can usually double the amount of their personal exemptions.
Exceptions
Personal exemptions are often used to save smaller items such as clothing and furniture.
They may be used to save an automobile. They’re usually not able to help couples save their home.
If one spouse files for a Chapter 13 bankruptcy, then that spouse is making arrangements to pay off the arrears and keep their possessions.
The spouse may be required to file bankruptcy as well. The spouse’s credit may be affected if he/she doesn’t file because the property (such as a home) will be under the control of the bankruptcy court.
There are also the problems that arise with buying a new home after bankruptcy, and is where conditions can become complicated.
According to investopedia, the current states that are community property states are:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
Alaska allows couples to opt-in to a community property arrange. Property is also considered community property for domestic partners in California, Nevada, and Washington.
There is a potential benefit to a spouse who jointly owns debt in a community property state. If you file bankruptcy alone, the creditor can proceed to try to collect from your spouse after your discharge.
However, normally, creditors can only try to then seize your spouse’s own property – not any marital community property.
States that use common law
In non-community property states, ownership or property is generally based on how the property is titled.
In these states, if property such as a home is titled in just your name, the creditor or trustee can seize these possessions to pay off any creditors. The trustee shouldn’t be able to seize property that is titled in just your wife’s name alone.
If property is titled in both names, the rights of the trustee become more complicated. You should review them with an experienced bankruptcy lawyer before you file for bankruptcy.
The trustee may be able to seize a jointly titled home, car, or other assets – unless the asst can split in ½ (like a bank account).
The trustee will then need to sell the assets. ½ of the proceeds will be payable to your spouse. Your ½ share will be used to pay creditors.
Does your bankruptcy affect your spouse’s credit
The key issue is who is liable to pay the debts. If the debt is in just your name, then you will need to file a Chapter 7 or Chapter 13 bankruptcy (if you can’t pay your bills on time).
If your debts are discharged in a Chapter 7, the creditors should not be able to report the debt to any credit agency. They should not be able to try to collect from your spouse.
Some debts a spouse may have acquired before the marriage. Some debts like medical bills are usually just in the name of one spouse.
Mortgage companies generally will require that both spouses sign the loan agreement – though there are cases where one spouse can seek a loan. Also, some people buy a home in their own name and then marry after the home purchase – which can further complicate the rights of a spouse in bankruptcy.
If you pay off the debt through a Chapter 13 bankruptcy, then the creditors shouldn’t come after your spouse once the debt is paid. Generally, if a debtor files for bankruptcy, then the trustee and creditors can’t proceed against your spouse or her credit while you’re paying off the debt.
If, however, both spouses are responsible for the debt, then once you are discharged, creditors can proceed to try to collect the balance of the debt from your spouse.
Eligibility to file a Chapter 7
In Chapter 7 cases, the bankruptcy court does consider the income of both spouses in deciding whether the debtor is eligible for a Chapter 7. If the combined incomes are too high, the main debtor may be forced to file a Chapter 13.
In Chapter 13, debtors generally take 3-5 years to pay off secured debts and pay a portion of any unsecured debts.
The income amount for the eligibility test should be reduced by the reasonable expenses your spouse needs to support himself/herself with. Your spouse’s income generally cannot be used to pay off any debts while you’re in bankruptcy.
The income factor applies to eligibility for a Chapter 7, not to the payment of your bills.
Practical considerations when a spouse files bankruptcy
In addition to the bankruptcy issues, there are domestic issues as well. Financial difficulties are often a contributing factor to divorce.
A spouse who is considering filing a bankruptcy should be honest with their spouse. They should also do what they can to protect their spouse. In some cases, a spouse may need separate legal counsel.
Additional considerations, both financial and domestic, may apply if the spouses divorce prior to, during, or after the bankruptcy filing date and the bankruptcy discharge date.
Married couples can file bankruptcy jointly. They don’t each have to file separate bankruptcy petitions.
