Are you considering filing for bankruptcy, but unsure if you can do so without involving your spouse?
The thought of bankruptcy can be overwhelming, and you may be wondering how it could impact your significant other.
Community Property States
Community property states abide by the principle that property acquired during a marriage is jointly owned by both spouses, regardless of title or the contribution made by each spouse. [1]
This means that any debt incurred during the marriage is generally considered a joint liability, even if only one spouse initially signed the contract or took on the debt.
In a community property state, filing for bankruptcy as an individual does not automatically eliminate your spouse’s liability for joint debts. While you can file for bankruptcy without involving your spouse, this may have consequences for both of you, particularly in relation to joint assets and community property.
Community property states include:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
Five additional states—Alaska, Florida, Kentucky, South Dakota, and Tennessee—have adopted an opt-in community property law.
Registered domestic partners residing in California, Nevada, or Washington are also governed by community property laws.
Separate Property and Debts
Specific circumstances of your situation will determine if you can file bankruptcy without your spouse. Here are some things to consider:
- Joint Debts: If you and your spouse have joint debts, such as a mortgage, car loan, or credit card debt, it can complicate matters. Even in common-law property states, joint obligations may need to be considered during bankruptcy proceedings, as they could affect the overall assessment of your financial situation.
- Non-Marital/Filing Spouse's Debts: Individual debts incurred before the marriage or solely in one spouse's name are typically considered separate debts. In most cases, filing for bankruptcy as an individual will not affect your spouse's credit or financial standing. Consult with a bankruptcy attorney to analyze your specific situation and state laws.
- Income: Whether you can file individually without your spouse also depends on your income sources. If you and your spouse's income are essential for the determination of disposable income in bankruptcy, you may need to include their financial details during the process.
- Exemptions: Exemption laws determine which assets can be protected during bankruptcy. In community property states, assets acquired during the marriage may be subject to seizure even if they are solely in one spouse's name.
- Joint Bankruptcy: If both spouses are facing overwhelming debts, filing for joint bankruptcy may be the best solution, as it consolidates individual debts in a single process. Joint bankruptcy can simplify the procedure and potentially reduce costs compared to filing individually.
Credit Rating for Spouse if You File Bankruptcy Without Them
Each spouse has their own credit history and credit rating, which are based on their personal financial activities. If one spouse decides to file for bankruptcy, it should not automatically affect the credit rating of the other spouse.
There are a few factors that can indirectly impact the credit rating of the spouse not filing for bankruptcy. These factors primarily revolve around joint debts, shared accounts, and financial responsibilities that are intertwined between spouses.
If you have joint debts with your spouse, such as a mortgage or a car loan, and you choose to file for bankruptcy, your discharge will eliminate your legal obligation to pay those debts. This does not discharge your spouse’s responsibility for the joint debts.
Pros of Filing Bankruptcy Without Your Spouse
Some pros of filing for bankruptcy without your spouse, include:
- Protecting the Credit Score: If one spouse has a significantly lower credit score due to financial issues like unpaid debts or late payments, filing individually allows the other spouse to protect their credit.
- Sole Financial Responsibility: By filing individually, one spouse can take sole responsibility for their own debts, shielding the other spouse from any potential legal ramifications.
- Emphasizing the Separation of Finances: Filing bankruptcy separately reinforces the separation of finances and allows each spouse to solely address their individual debts.
- Preserving Joint Assets: Filing bankruptcy individually can help protect joint assets, such as a shared home or a joint bank account, from being included in the bankruptcy process. This can provide a sense of stability and continuity during a financially tumultuous time.
- Potential for Quicker Process: Filing bankruptcy individually can expedite the process, as there is only one person's financial situation to evaluate and address. This can lead to a quicker resolution, allowing the spouse who filed to begin rebuilding their credit sooner.
Cons of Filing Bankruptcy Without Your Spouse
There are several potential disadvantages to filing for bankruptcy without your spouse:
- Limited Debt Relief: Filing for bankruptcy as an individual will only discharge your personal debts, not those shared with your spouse. Meaning that joint debts, such as mortgages, car loans, or credit card debts, will still be the responsibility of your spouse. They will have to continue making payments on those debts, potentially putting a strain on their finances.
- Credit Implications for Both Spouses: Even though your bankruptcy filing will not directly impact your spouse's credit score, it can still indirectly affect their ability to obtain credit. Lenders may view the joint debts as a potential risk, making it harder for your spouse to secure loans or credit cards in the future.
- Potential Loss of Joint Assets: Depending on the bankruptcy laws in your jurisdiction, joint assets, such as a shared home or investments, may be at risk during bankruptcy proceedings. The court may liquidate these assets to repay creditors, potentially causing financial loss or instability for your spouse.
- Complicated Financial Planning: If you wish to purchase a home together after bankruptcy, the lender may consider your low credit score and history as a higher risk, potentially leading to higher interest rates or rejection of loan applications.
Automatic Stay
The automatic stay goes into effect the moment an individual files for bankruptcy. Its primary purpose is to provide immediate relief by halting all creditor actions against the filer. This provision applies regardless of whether an individual or spouse files for bankruptcy, meaning that one spouse’s bankruptcy generally does not impact the other’s legal and financial status. [3]
When one spouse decides to file for bankruptcy without the other, the automatic stay provides a layer of protection for the non-filing spouse. During the automatic stay, creditors are temporarily prohibited from:
- Initiating or continuing any legal proceedings
- Pursuing debt collection efforts
- Repossessing properties or assets, including joint assets held by the non-filing spouse
The automatic stay does not cover debts solely held by the non-filing spouse, nor does it extend to child support or alimony obligations.
Contact Richard West bankruptcy lawyer today to schedule a consultation and discover out your options.
Sources:
[1] What Are the Community Property States? – SmartAsset | SmartAsset. (2023, August 25). https://smartasset.com/financial-advisor/community-property-states
[2] Parker, T. (2024, April 17). Community Property States. Investopedia. https://www.investopedia.com/personal-finance/which-states-are-community-property-states/
[3] Kagan, J. (2024, March 26). Automatic Stay: What It Is, How It Works, Example. Investopedia. https://www.investopedia.com/terms/a/automaticstay.asp
