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Decisions on finances are very important in a marriage, and communicating how to deal with these situations is one of the keys to a healthy marriage. Many people file for bankruptcy, and of those who file, 64% are married couples. This is why it is essential to understand the effects this decision has on a significant other.

Wanting to protect a spouse from the harsh outcomes of your bankruptcy proceedings is normal. A big part of doing that is understanding your finances and debt situation, as well as the laws that might apply. It’s also important to decide if a couple is filing together or individually. Both choices, whether good or bad, will have an impact on a spouse’s credit, income, and assets. Grasping this fact gives people a better perspective of what could happen to their spouses once they file for bankruptcy. 

Should I File Separately from My Spouse? 

There are many circumstances that would make it advisable for a person to want to file separately from their spouse. Being informed of your spouse’s financial state will help you make better decisions that will protect both people in the marriage. If you are thinking about filing separately from your spouse, here are some things to consider:

Your spouse has hardly any debt: When your spouse has barely any of their own debt, it’s better to file separately. Maybe the spouse has paid off all student loans, or perhaps they paid for their car in cash. For that spouse, there is no lender. Everything is fully owned by them. That person won’t need protection from collectors. Exposing your wife/husband to these proceedings may cause more harm. For example, filing together would put both spouses’ credit scores at risk and will stay on their report for several years. When thinking about filing bankruptcy, each party should sit down and consider their individual debts. 

A prenuptial agreement has been made and finances are separate: Prenuptial and postnuptial agreements are common in marriages today. If property and debts are covered in these agreements between you and your spouse, then filing separately could be a good idea. These types of agreements handle premarital and marital assets and debts within the marriage or at the end of the marriage. When making these agreements, it’s best to seek legal advice to ensure it works for both spouses. In fact, it’s common to hire two attorneys to overlook such documents. This way both parties benefit from a well-balanced contract. 

A spouse could be receiving an inheritance soon: Inheritances, gifts, and even personal injury settlements going to your spouse are your spouse’s personal property. Their property won’t be affected by your bankruptcy case. However, if the spouse is expecting these inheritances or gifts and files for bankruptcy, their assets could be in jeopardy. Suppose the spouse received those things right before filing or after filing. Those gifts will be up for grabs in the bankruptcy proceedings. If you are aware that your spouse is going to be receiving inheritances soon, it’s best to just file separately to protect them. The timing of such windfalls is important, and you should speak with an attorney about your options if you are in this situation.

Your spouse is a business owner: Being a business owner and filing for bankruptcy is complicated. Not only do you have to think about what chapter to file, but a person must also think about what type of business they own. Is it a sole proprietorship, LLC, partnership, or corporation? All of this needs to be considered. Your spouse’s business can be affected and their business could also complicate your bankruptcy proceedings. Hiring an attorney to oversee your bankruptcy and business status is a wise idea. They will be able to determine how the business will be affected, and how the business may affect the bankruptcy proceedings. 

The person wants to ensure the other spouse can file in the future: When a person files for bankruptcy, there is a time limit on when they can file again. If a person filed chapter 7 and received a discharge of debts, they would have to wait eight years to file again. After filing chapter 13, a person must wait two years to file again. Filing for bankruptcy as a couple will affect your spouse’s ability to apply for bankruptcy in the future. 

Common Law Property Vs. Community Property 

Married people need to know what law applies to them before filing. These laws will greatly affect how a person will proceed when filing for bankruptcy. 

Community property is a U.S. state-level legal distinction that designates married people’s assets. In a community property state, a spouse’s income and property are considered community property, which means it belongs to both parties. There is no separation of assets, even if one puts more into the relationship financially. In America, nine states recognize this law. 

Those states are: 

• California
• Arizona
• Nevada
• Louisiana
• Idaho
• New Mexico
• Washington
• Texas 
• Wisconsin

Alaska, South Dakota, and Tennessee are “opt-in” states for community property. An “opt-in” provision allows residents in these states to choose between common law or community property when filing bankruptcy. The decision of what status to choose will be made during the marriage. The couple can fully opt into the system, or certain assets can be considered community property. 

All community property must be listed when a person files for bankruptcy in one of these states. Debt that was acquired during the marriage would be shared. This puts the property that the significant other has at risk. It’s always good to consult a lawyer about the state laws concerning community property. Some of these states treat gifts, inheritances, or assets acquired before marriage differently. 

Common law property is when each spouse owns and controls property acquired during the marriage. For residents in common law states, when a married person buys a house, car, or  vacation home, that property belongs to that individual. The other spouse will have ownership over the property only if both of their names are put on the titles. The law applies to both tangible and intangible assets, meaning along with physical property, intellectual property – such as a patent or trademark – is covered as well. 

Most states follow this law. If you live in a state where this law applies, it is easier for the spouse’s property to be protected, especially if the person is filing for a liquidation bankruptcy. This scenario is good when the couple’s assets are in the same state. However, it can become more complicated if the couple has assets in a community law state.

If you find yourself in this situation it’s best to consult with an attorney to determine the best path forward.

Which Bankruptcy Chapter Is Best for You? 

There are several bankruptcy chapters to choose from, but the two most common are chapters for individuals considering filing are Chapters 13 and 7. Although both chapters alleviate debts, how they do it is different. Therefore, getting an attorney to explain how each chapter works in order to get the best outcome for your spouse is wise. 

Chapter 7 is referred to as liquidation bankruptcy. Essentially debts get wiped out, and to pay back creditors, assets will be sold. When the filing happens, an “automatic stay” will be enforced. This will stop any foreclosures, repossessions, and debt collection lawsuits while the bankruptcy proceedings occur. The “automatic stay” is also applied in chapter 13. A means test will determine if the person qualifies for chapter 7. Under both bankruptcy chapters, both spouses’ income will have to be reported, even if only one of them is filing. This can change, however, if the spouses are separated and living in different homes. 

The debt will be shared if the person filing lives in a community property state. However, if one spouse files separately, their debt will be discharged, but the other spouse will remain responsible for community property debt. Keep in mind that all property acquired separately by the person filing for bankruptcy becomes part of the bankruptcy case and is fair game. 

If the married couple lives in a common law state, then the filer’s property will be a part of the bankruptcy case. However, the other spouse’s personal property is not a part of the case. Any property owned jointly will become a part of the case. The filer’s debts and joint debts will be discharged. If the spouse has their own debts, that will not be discharged. 

For example, if the husband files for bankruptcy, then all of his property: car, boat, and the inheritance will be affected by his bankruptcy proceedings. However, his wife’s business, car, and any property she individually owns will not be affected. The caveat is that if any property is owned together, it will be included in the proceedings. If a husband and wife own a house together or have a joint bank account, then creditors can touch that. Because the husband is the filer, his debts and any debts that are combined with his wife will be discharged. However, her individual debts will not be discharged in the proceedings. 

An example: 

John and Sarah are married and they both own property separately and together. John ends up filing for chapter 7 bankruptcy during their marriage. 

• Sarah personally owns a Honda Civic, a nail salon, and a townhome from her inheritance. Sarah also has $5,000 in medical debt. 

• John personally owns a Jeep Cherokee and a sailboat. John also has a $20,000 personal loan debt. 

• John and Sarah own a four-bedroom house together and share a joint bank account. They also have a shared debt of $10,000 from a joint credit card. 

John’s combined debt is $30,000, while Sarah’s debt is only $15,000. 

What are the results of John’s bankruptcy?

When John files for bankruptcy the creditor is allowed to liquidate his Jeep Cherokee, his sailboat, and the four-bedroom house he owns with his wife. The creditors are also allowed to take from the joint bank account. John is able to discharge his $20,000 personal loan debt and his shared $10,000 credit card debt. 

Sarah’s Honda Civic, townhome, and nail salon will remain untouched because she owns that separately. However, she is still responsible for her $5,000 medical bill, and creditors can still come after her for the $10,000 shared debt. 

By the end of John’s chapter 7 bankruptcy proceedings, all of his debt is discharged. While Sarah is still on the hook for $5,000 and, potentially, $10,000. 

Chapter 13 is known as a “repayment” bankruptcy. In this chapter, a repayment plan is worked out. In a three- or five-year plan, you’ll repay the creditors. Either some or all of the debt will be paid back. Even if one person files, both incomes are considered when making the payment plan. The good news is property will likely be protected because this chapter doesn’t liquify assets. In the bankruptcy petition, only the name and social security of the filer will be seen. Because of this, the other’s spouse’s credit won’t be affected. 

Seek Legal Advice from an Attorney

Many factors will affect you and your spouse in bankruptcy. There are a lot of laws to be aware of when filing, and it can be difficult to know of and consider them all, not to mention the paperwork associated with declaring bankruptcy. An attorney can address all such details throughout the bankruptcy process, which will make a difference for each person in the marriage. Rosenblum Law has lawyers dedicated to achieving the best results possible in clients’ bankruptcy cases. Don’t hesitate to contact us for a free consultation today.