Marriage can join a couple at the financial hip, but this is a choice, not a legal requirement in most states. Except in the nine community property states, taking on joint debts while you’re married is a personal decision. In any state, you’re not prevented from filing bankruptcy on your own just because you’re married, but the effect of your discharge can depend on where you live.
If you live in one of the 41 common law states, you’re the only one legally responsible for debts solely in your name. You can discharge these debts in bankruptcy, and it won’t have any effect on your spouse or her credit. But, if you have joint debts with her, only your liability is erased with a Chapter 7 discharge. Your spouse becomes responsible for 100 percent of your joint debts because the creditors can no longer collect from you. If you file for Chapter 13 -- the bankruptcy that requires you to repay your debts over three to five years in a court-approved plan -- the automatic stay also covers co-debtors. This stay keeps creditors from trying to collect on debts while you’re in bankruptcy. But this is only the case during the life of your repayment plan. If you don’t pay off joint unsecured debts entirely under your plan, the balance is discharged and you’re no longer responsible for paying them, but your spouse still is because she didn’t file for bankruptcy with you. Creditors can begin pursuing her for payment as soon as your Chapter 13 bankruptcy plan concludes.
Chapter 7 is a liquidation bankruptcy -- the trustee takes control of your non-exempt property and sells it, giving the proceeds to your creditors. But the bankruptcy allows you to safeguard some value in your assets by using exemptions. For example, if you have an automobile worth $4,000 and your state offers a $4,000 automobile exemption, the trustee can’t take the vehicle and sell it. If you file for bankruptcy separately, without your spouse, assets you hold jointly with her may be at risk for liquidation if your exemptions aren’t enough to cover you share of their value. If you have $100,000 equity in your home, and your available homestead exemption is $25,000, the trustee can and probably will force the sale of the property. There’s $25,000 there that can go to your creditors -- your share of the equity is $50,000 and you’ve only been able to exempt half of that. After the sale, the trustee must pay your spouse her share of the equity out of the proceeds and give you $25,000 as well, the amount of your exemption.
Community Property States
Washington, Wisconsin, Louisiana, Texas, New Mexico, Arizona, California, Nevada and Idaho are community property states. The law in these jurisdictions treats all property acquired during the marriage and all debts taken on during that time as joint assets or liabilities, even if only one spouse’s name is on the title or contract. When you file for Chapter 7 in one of these states, all your community property is subject to liquidation, even if your spouse doesn’t file for bankruptcy with you. She’ll remain solely liable for all marital debts after your discharge, but creditors can no longer try to collect these debts from your community property, such as by placing a lien against your home. Your spouse’s separate property -- anything she owned before you married or she acquired by way of gift or inheritance made solely to her -- is up for grabs, however, if she signed on any accounts with you.
If You File With Your Spouse
The only time it usually makes sense to file for bankruptcy separately, without your spouse, is if you live in a common law state and debts you want to discharge are all -- or mostly -- your own. Otherwise, there’s usually a significant advantage to filing together, so speak with an attorney when making the decision. Some states allow you to double your Chapter 7 exemptions when you file together, so you can protect more property, but get legal advice to find out if this is necessary.