How Will My Bankruptcy Affect My Spouse?

California law creates some unique considerations

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Filing for bankruptcy is a very personal decision, and of course should never be entered into lightly. As you consider entering this process, if you’re married, you’ll also need to decide whether you‘ll seek bankruptcy protection individually or jointly with your spouse. Although bankruptcy law is federal, there are some unique laws in California that govern how your bankruptcy will affect your spouse.

Community Property

California is a community property state, which determines what you own separately, what your spouse owns, and what you own together. Typically, anything you had before the marriage, as well as anything you’ve received as separate gifts (and kept separated), or an inheritance will be separate property. Most property, income and debt accrued during the marriage will be community property, even if only one spouse’s name is on the title. You may have credit cards or other debts in your individual name that the other spouse didn’t sign an application for, which might keep that type of debt out of the community, depending on circumstances (such as whether it was used for necessities).

“Even if you keep separate accounts, once they’re used for the benefit of the marriage—say you start buying diapers with your credit card—arguments can be made that it’s community property,” says Ori S. Blumenfeld, a bankruptcy attorney with Law Offices of Michael Jay Berger in Beverly Hills

Blumenfeld cites another example, in which a spouse buys a condo before they were married. Later, that spouse loses their job and struggles to make a mortgage payment, so the other spouse pays to help them get by. “There would then be an argument that the condo is community property, even though their name isn’t on the title or loan, because of that one mortgage payment,” he says.

“But so long as there’s no inkling of comingling, you should be fine.”

In determining the effect of bankruptcy, you’ll need to assess what you have in each of the buckets of community and separate property and debt. Where you have a significant amount of community debt, the effect of filing bankruptcy as an individual will be that, after certain exemptions, your creditors will be able to collect on the debt from any nonexempt community assets, as well as from your spouse’s separate property because the debt is also theirs.

If, on the other hand, you have very little shared debt and most of your dischargeable debt can be characterized as separate, there may be little impact on your spouse beyond nonexempt community assets, as these debts would not be collectible against your spouse. Additionally, if your spouse has a significant amount of separate property and there is not an available exemption, it may be advisable to keep this out of the bankruptcy.

“File individually always,” Blumenfeld says. “If you can save one person’s credit, you absolutely should. You might want to secure a loan or buy a house one day. If you don’t need to file, you just shouldn’t. It’s a last resort.”

Credit Report

If you’re filing for bankruptcy, chances are your credit score is already trashed, and while bankruptcy will allow you to begin to rebuild your credit, note of your bankruptcy will remain on your report for 10 years. If there are community debts that have gone unpaid, chances are the impact has already affected both spouses. However, it’s possible that your spouse has maintained good credit and will be able to continue to do so while you are in the process of rebuilding, which can also help restore your joint credit more quickly.

Chapter 11 and Chapter 13 bankruptcy filings—especially reorganizations—are extremely difficult to navigate on your own, Blumenfeld says. “It’s possible to do a Chapter 7, but think of it like another language. Or a brain doctor trying to do a foot surgery. I appreciate anytime a client researches and becomes familiar with the process, but I wouldn’t even tell a friend, ‘You can do it on your own.’”

Chapter 11 bankruptcies are the most lengthy, and often take 14 to 18 months to be confirmed. “And that’s assuming they confirm,” Blumenfeld says. “The majority don’t; less than 10 percent go through. They seem to go on forever and this is in a good economy, where the courts aren’t overwhelmed.” Because of the time involved, bankruptcy attorneys typically charge hourly fees for a Chapter 11, while 13 and 7 are more often a flat fee.

As Blumenfeld contests, bankruptcies are complicated and circumstantial. An experienced bankruptcy attorney will be able to sort through issues of who owns what, how your debts will be allocated, and how best you can move forward to rebuild your financial stability.

California

“Even if you keep separate accounts, once they’re used for the benefit of the marriage—say you start buying diapers with your credit card—arguments can be made that it’s community property. ... But so long as there’s no inkling of comingling, you should be fine.”

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