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How Does a Bankruptcy Filing by One Spouse Affect the Non-Filing Spouse?

Seemann from morguefile.comA bankruptcy case can have a profound impact on a person’s financial life, sometimes requiring changes to personal budgets and debt payments, as well as possible liquidation of non-exempt assets. What happens when a person needs bankruptcy protection, but their spouse does not? How will one spouse’s bankruptcy case affect the other spouse? The answer depends on the laws of the state where the debtor and the debtor’s spouse live. In California, which is a community property state, most property acquired during a marriage belongs to both spouses. This means that one spouse’s bankruptcy can have an impact on the other spouse, but the spouses can prepare for and minimize this impact with the help of a skilled bankruptcy attorney.

Consent from Both Spouses Is a Good Idea

Federal bankruptcy laws do not necessarily require a spouse to consent to the other spouse’s bankruptcy, but it is a very good idea to have the spouse’s cooperation. The non-debtor spouse should be named in the petition as a participant. Means testing, a feature of the bankruptcy reforms of 2005, requires information on a debtor’s income, and wage garnishment can be a feature of a repayment plan. If one spouse does not know about a bankruptcy case, they most likely will find out.

Community Property Issues

California treats most property acquired during a marriage as community property, meaning that both spouses own it in equal parts. Bankruptcy exemptions may protect a large amount of common community property, such as a marital residence or automobile, but the debtor must list all community property on the inventory presented to the trustee. Community property interests could create complications in a Chapter 7 case, such as if the trustee wants to sell community property but cannot get the non-debtor spouse’s permission.

Joint Debts

A bankruptcy can affect the non-debtor spouse with regard to two kinds of debts: debt on which the non-debtor spouse is a joint or co-signer, and debts secured by community property. If the court discharges a debt on which the non-debtor spouse is jointly liable, the creditor may still pursue the non-debtor spouse on any outstanding balance. For debts affecting community property, however, a discharge for the debtor could benefit the non-debtor spouse through something called a “phantom discharge.” A discharge of debt secured by community property discharges the debt, in effect, for both the debtor and the debtor’s spouse, albeit with some important limitations. 11 U.S.C. § 524(a)(3); In re Thongta, No. 07-21837-svk, mem. at 3 (Bankr. E.D. Wis., Jun. 5, 2009) (“[T]he phantom discharge only protects after-acquired community property from collection efforts.”)

Credit Reports

One spouse’s bankruptcy filing will not necessarily have an adverse effect on the non-debtor spouse’s credit score. Information about the spouse’s bankruptcy, however, may appear on the non-debtor spouse’s credit report, particularly with regard to community or joint debts.

Relief from overly burdensome debt is possible in a bankruptcy case, such as when a person’s income does not allow them to keep up with the payments. Bankruptcy attorney Devin Sawdayi has represented debtors in the Los Angeles and surrounding area in Chapter 7 liquidation cases and Chapter 13 reorganization bankruptcy cases for the past sixteen years. To schedule a free and confidential consultation with attorney Devin Sawdayi to see how we might be able to help you with your case, please contact us today online or at (310) 475-9399.

More Blog Posts:

The Effects of Bankruptcy on Your Credit Score, Los Angeles Bankruptcy Lawyer Blawg, August 14, 2013

Child Support and Spousal Maintenance Obligations Are Not Dischargeable in Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, August 12, 2013

Illness or Other Misfortune Often Leads to Bankruptcy, as Shown by a Los Angeles Chapter 13 Case, Los Angeles Bankruptcy Lawyer Blawg, June 25, 2013

Photo credit: Seemann from morguefile.com.