Bankruptcy law allows two married people to file together.
It does not require that they both file, either.
So, how does it work when only one spouse files bankruptcy?
Who’s in bankruptcy
A bankruptcy filing by one spouse does not bring the other spouse into bankruptcy.
Neither does the bankruptcy of a spouse give the non filing spouse the full protection of the automatic stay or the bankruptcy discharge.
The full force of those protections are reserved for the debtor.
Joint debts of the marriage
If you and your spouse are jointly liable to a creditor, the bankruptcy of one spouse does not relieve the other of paying the debt. Upon a bankruptcy, the creditor may look to the other spouse for payment, unless the bankruptcy case is under Chapter 13.
If the debt is a consumer debt to be paid 100% through the Chapter 13 plan, the co debtor is protected by the codebtor stay in §1301.
Generally, marriage alone doesn’t make both spouses personally liable for a debt. Liability on contracts such as home loans and credit cards arises by agreement between the creditor and the debtor. Only persons who signed the loan or credit application are liable for the debt.
A joint tax return, however, makes both spouses liable for the total of the tax due.
If you have joint debts, you can expect the bankruptcy to be noted in some way on the credit record of the non filing spouse. There is uncertainty in the law at the moment as to whether it is proper to mention the bankruptcy of one debtor on the credit report of a debtor who is not in bankruptcy.
Joint property of marriage
If you and your spouse own property together, that property may be included in the bankruptcy estate and be potentially available to pay creditors.
In community property jurisdictions such as California, both halves of the community property comes into the estate: all of the community property is available to pay community creditors and any other creditors of the spouse who has filed.
So the filing of one spouse could have significant impact on the other.
Bankruptcy impact on property owned jointly with someone other than spouse
Community property discharge
When one spouse files bankruptcy in a community property state, the marital community enjoys the protection of the filing spouse’s bankruptcy discharge. Section 524 of the Bankruptcy Code provides that any community property that the filing spouse and the non filer acquire after the bankrutpcy is protected from creditors of the non filer who held a claim against the non filing spouse as of the date of the filing.
A creditor with a claim against the non filing spouse can only collect its debt from the separate property of the non filing spouse. In California, that separate property is comprised of assets acquired before marriage; assets acquired by gift during marriage; or assets acquired by inheritance.
Creditors, despite the fact that the community property discharge has existed since at least the passage of the Bankruptcy Code in 1978, have a hard time believing that someone in a community property state gets the benefit of their spouse’s bankruptcy discharge, but that’s the law.
Credit reports
Each person has (or is supposed to have) a separate credit file for credit reporting purposes. Your debts, if yours alone, are not supposed to show in your spouse’s credit file. Similarly, your bankruptcy should not show in your spouse’s file if you have no joint debts.
Even so, it pays to monitor your credit file, since credit reporting, like so much else in life, does not always follow the law.
Future credit
The bankruptcy of one spouse will have some effect on the credit worthiness of the non filing spouse if they apply jointly in the future for a loan. The loan grantor will consider the credit rating of both applicants in making a lending decision.
More on post bankruptcy credit.
More on community property and its exposure to debt
Image courtesy firemedic54.
