Implications of Bankruptcy Filing For Non-Filing Spouse

JOINT DEBT AND JOINT PROPERTY

Bankruptcy filing by one spouse generally does not result in the non-filing spouse involuntarily joining in the bankruptcy process.  Each individual is typically responsible for his or her own debts unless the underlying debt is a joint debt or co-obligation of both spouses.  For example, joint liability on a tax return or mortgage obligation, which requires the affirmative consent and signature of both spouses, is typically considered joint debt of the debtor and non-debtor spouse.

If a debtor and the non-debtor spouse are jointly liable to a creditor, the bankruptcy of one spouse will not relieve the non-filing spouse from the obligation to repay the creditor the balance due.  Moreover, the non-filing spouse will not benefit from the automatic stay that is imposed once a debtor files for bankruptcy protection.  Accordingly, a creditor that holds a joint debt may pursue the non-exempt separate property of the non-filing spouse to recover its claim in full despite the pending bankruptcy of the debtor spouse.  However, If the obligation of the debtor spouse is comprised of consumer debt to be paid in full (100% payout) under the chapter 13 plan, the co-debtor is protected by the co-debtor stay in section 1301 of the Bankruptcy Code.

COMMUNITY PROPERTY AND BANKRUPTCY DISCHARGE

California is among the nine community property jurisdictions in the United States.[1] Therefore, when one spouse files bankruptcy in a community property state, the marital community enjoys the protection of the debtor spouse’s bankruptcy discharge.  Notice, that it is the marital community and not the non-debtor spouse generally that is protected by the discharge since a creditor may pursue the non-debtor spouse’s non-exempt separate property in order to recover full payment on a joint obligation.  In California, separate property generally consists of: (i) assets acquired before marriage (that have not been commingled with community assets); (ii) assets acquired by gift during marriage; or (iii) assets acquired by inheritance.

As a result, once a discharge is granted under section 524 of the Bankruptcy Code, any community property that the filing spouse acquires after the bankruptcy filing is protected.  Even if creditors assert a claim against the non-filing spouse for joint obligations, that creditor will not be able to recover its claim against community property whether acquired prior to the bankruptcy or after the filing of the petition.

CREDIT REPORTING

The general rule is that each individual has his or her own credit report and score.  However, the joint liability of a spouse on a debt would be included on both credit reports.  Therefore, if one spouse files bankruptcy and includes a joint obligation on his or her bankruptcy schedules, the bankruptcy will likely appear on the non-debtor spouse’s credit report.


[1] Community property states include: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.  Alaska and Tennessee allow for elective or consensual community property laws, which allow resident and nonresident couples to classify property as community property.

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