How Filing for Bankruptcy Affects Your Spouse
Many people feel they can file for individual bankruptcy without affecting their spouse however this is not always the case. The manner in which your specific debts and assets will be treated should bankruptcy be filed is largely dependent upon whether you reside in a state which operates under community property or one that is considered a common law state. Common law states operate under the rules of equity and overall fairness, leading to an entirely different outcome than a state which follows community property law. Those community property states generally seek to divide all property right down the middle meaning it can be hard to exclude a spouse during a bankruptcy filing. Community property states don’t care whose name is on the title of an asset, only whether it was acquired during the marriage. Common law principles state that if your name is on a property title or you bought it under sole and separate law, then it is yours but if you own it jointly each of you owns 50% unless it has been otherwise designated.
Common Law and Bankruptcy
In a common law state any property you own apart from your spouse as well as your piece of any assets owned together can be taken and sold should you not possess sufficient exemptions to cover those assets. In this case any separate property which belongs to your spouse as well as their share of your joint property will not be incorporated in your personal bankruptcy filing, and if the asset is unable to be split, the trustee will be required to prove that the benefits of disposing of the jointly owned property justifies any detriment to your spouse. Even though your spouse’s separate property may not be a factor in a common law state, you may nonetheless be required to disclose those assets simply to allow the trustee to ensure the property is, in fact, separate property.
Community Property and Bankruptcy
Under community property law unless the spouses have specifically specified otherwise—and sometimes even if they have—both spouses equally and jointly own assets gained during marriage no matter whose name is on the title. This means that no matter whether you file bankruptcy with your spouse or not, all of your community property assets are part of the bankruptcy. Obviously, more assets are in danger in a community property state, although some states will give you an exemption break when filing with your husband or wife.
How Debts are Treated in Bankruptcy
Whether you live in a common law or community property state, just the husband or wife who is actually filing for bankruptcy will get a discharge of debts leaving the non-filing spouse liable for both separate debts and his or her portion of joint debts. In a community property state, the non-filing spouse may be eligible for an additional benefit regarding joint debts. In theory if debts belong only to one spouse, then when that spouse files for individual bankruptcy there should be little impact on the husband or wife or their credit score, but in practice this is not always the case. Consider the case of supplementary credit cards which are very customary among married couples. A supplementary credit card bears the same account number as the primary card, therefore if a spouse has ever actually used the supplementary card they will likely be considered equally accountable for all accumulated debt on the card even if the debt does not belong to them.
How your particular assets and debts will be treated during a bankruptcy filing is dependent on quite a few factors, therefore it is definitely in your best interests to speak to a bankruptcy attorney prior to filing to determine what extent your spouse will be liable for your debts. An attorney can also guide you through the bankruptcy process, looking out for your rights along the way.