How Bankruptcy By One Spouse Affects The Nonfiling Spouse
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.
Handling Joint Debts
If both spouses 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 co-debtor stay in §1301. (Chapter 13 may be the way to go!)
It is not true that marriage alone makes both spouses personally liable for a debt. Liability on contracts such as home loans and credit cards arise by agreement between the creditor and the debtor. Only persons who signed the loan or credit application are liable for the debt. If the debt is a community property debt is another analysis.
A joint tax return, however, makes both spouses liable for the total of the tax due.
You can expect the bankruptcy by even one spouse 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 if they have joint debts.
Addressing Joint property
If you and your spouse own property together, that property may be included in the bankruptcy estate and could be available to pay creditors. In community property jurisdictions such as California, both halves of the community property come 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.
Community Property And Debt 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 bankruptcy is protected from creditors of the non-filer who held a claim against the non-filing spouse as of the date of the filing. Family law and community property can provide some of the tools to benefit a non-filing spouse from certain debts.
A creditor with a claim against the nonfiling 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.
The Effects Of Bankruptcy On 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.
Call Us To Learn More
Discuss the intersection of family law and bankruptcy with attorneys who understand both. Call Simkin & Associates in Los Angeles at 310-788-9089 or book your first appointment with us online using our contact form.