How Does Bankruptcy Filing Affect My Spouse?

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 a married couple, you’ll also need to decide whether you’ll seek bankruptcy protection individually or jointly with your spouse.

Although bankruptcy law is federal law, there are some unique state laws that govern how your bankruptcy will affect your spouse. Reach out to an experienced bankruptcy lawyer in your area for legal advice.

When Only One Spouse Files for Bankruptcy

Bankruptcy attorney Michael Koplen of Koplen Law Firm in New York likens a personal bankruptcy filing to a geometric math problem.

“Everything has to fit together exactly right. Every detail counts,” he says. “What goes into that petition has a definite effect on every single asset and every single debt that the person has.”

So how does your spouse fit into that equation? The good news is that in most cases, they don’t, especially if the credit card balance or other debt is in your name only. A Chapter 7 bankruptcy, in which debts are wiped out and assets are sold to repay creditors, has no impact on your spouse’s personal financial status, says Koplen.

Filing for Chapter 13 — in which you keep your assets but make payments to creditors over the course of three or five years in a non-filing plan — is a bit more complicated. Still, the non-filing spouse, even if they’re liable for half the debt, is financially protected for the term of the bankruptcy.

Filing in a Community Property or Common Law Property State

Bankruptcy is generally filed in federal court. However, where you live can change how a bankruptcy affects you and your spouse. A key difference involves whether you live in a common law property or a community property state. This affects which assets and debts are shared by the spouses and which are the spouse’s assets and debts.

In common law property states, ownership of property and debts generally depends on whose name is on the title, contract, or loan. If spouses co-sign on a car loan, then the debt becomes shared debt. If spouses put both names on a deed to a jointly-owned property, it is shared joint property.

Most states follow common law property. Nine states have community property systems, including California, Texas, and Washington. However, other states have opt-in community property options. Classifying your property can also change if you move from one type of state to another. Talk to an attorney about how shared and separate property will impact your bankruptcy case.

Community Property Law States

In a community property state, typically, anything you had before the marriage, as well as anything you’ve received as separate gifts (and kept separated), or 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 bank 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 Blumenfeld, a bankruptcy attorney at Offit Kurman in Los Angeles.

Blumenfeld cites another example in which a spouse buys a condo before they are 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 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. But so long as there’s no inkling of comingling, you should be fine.”

Determine What’s Community Property vs. Separate Property

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 as an individual will be that, after certain exemptions, your creditors will be able to collect on the debt from any nonexempt community assets in the bankruptcy estate, as well as from your spouse’s separate property, because the debt is also theirs.

If you have very little joint debt and most of your dischargeable debt can be characterized as separate, there may be little impact on your spouse beyond nonexempt community assets. These debts would not be collectible against your spouse. Additionally, if your spouse has a significant amount of separate property and there is no available exemption, it may be advisable to keep this out of 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.”

The Non-Filing Spouse May Actually Benefit from a Bankruptcy Proceeding

According to Barbie Lieber, a bankruptcy attorney at Lieber & Lieber in New York City, “The non-filing spouse may actually benefit from their partner’s Chapter 7 or Chapter 13 bankruptcy. In Chapter 7, bankruptcy discharge frees up family income that would otherwise go to pay creditors. Chapter 13 payments are typically much less than normal credit card payments, also freeing up family income.”

Lieber gives an example of a married couple with $40,000 and $30,000 in debt, respectively, together earning around $200,000 a year. The spouses are paying around $1,700 and $1,300, respectively, totaling $3,000.

“Given their joint income, the filer spouse probably wouldn’t satisfy the means test for a Chapter 7 but could file for a Chapter 13. In that scenario, the maximum amount the husband would pay in a 60-month Chapter 13 plan would be $850 — half the amount outside a bankruptcy. If the wife also filed, her maximum payment would be $650, and the couple’s payment would be $1,500 — again, half the amount outside bankruptcy. Additionally, no creditor could pursue the wife for any consumer debt for which she’s liable with the debtor while the bankruptcy is pending.”

Beware of Debt Settlement Companies

But Lieber warns against debt settlement companies that offer to consolidate your loans for a monthly payment. Not only do they charge hefty fees, but there can be tax consequences.

For example, if you settle a $20,000 debt for $10,000, the IRS considers the “forgiven” $10,000 as income. There’s also no guarantee that all of your creditors will accept the negotiated payments, which means you can still be sued. “Unlike a Chapter 13 or 7 where there’s an automatic stay [that stops creditors from trying to collect], in a debt settlement plan outside of bankruptcy, there is no protection from the court,” Lieber says.

Potential Benefits of Filing Separately

If you’ve accrued significant debt together and are behind on your mortgage payments, filing separately can buy you both some time to regroup. Separate filing can possibly save your house from foreclosure.

“I’ve kept people in their homes for 10, 12 years by filing bankruptcies one after the other,” Koplen says. “Either the bank came around, or at the very least, these people kept a roof over their heads for a really long time.”

Leaving a spouse out of your bankruptcy filing might be a good idea if they’re worried about their credit, own a business, or don’t have much debt of their own.

Does Filing Bankruptcy Destroy Your Spouse’s Credit?

Some people mistakenly think that bankruptcy destroys their credit rating. That’s a myth, says Koplen.

“Unless you have absolutely stellar credit, a bankruptcy filing in the United States has a minimal impact. Oftentimes, it results in a higher credit score, particularly with someone who has a lot of unsecured debt and files a Chapter 7 bankruptcy. Very often, that spouse’s credit report score can jump up 100, 150 points. If you file a Chapter 7 bankruptcy and get a discharge [that releases the debtor from personal liability], it’s like cutting an anchor off a boat, and the boat can float away.”

“What they should really be scared about is not filing while drowning in debt and being unable to pay for necessities because of credit card or loan payments that accrue at almost usurious interest rates,” says Lieber.

“They should be petrified of debt settlement companies that often extract large monthly payments and hidden fees without offering protection against lawsuits from creditors. Unfortunately, many people call me after having paid thousands of dollars to debt settlement companies and getting sued by creditors. Bankruptcy is a gift. It’s in our Constitution. It offers people a breathing spell and a fresh start.”

Find an Experienced Bankruptcy Lawyer

Chapter 13 bankruptcy filings 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 any time a client researches and becomes familiar with the process, but I wouldn’t even tell a friend, ‘You can do it on your own.'”

A single or joint bankruptcy can set you up for a better financial future. If you’re considering bankruptcy or other debt relief measures, visit the Super Lawyers directory to find an experienced bankruptcy attorney in your area for legal advice.