How Does Your Individual Filing for Bankruptcy Affect Your Spouse?
If you live in California, are married and are overwhelmed by debt, you may wonder if you should file for bankruptcy as an individual or jointly with your spouse. You may question, if you choose to go it alone, whether your spouse could lose some personal property, whether he or she can be held responsible for your debts and whether his or her credit score might be impaired. In general, the answer to all of these is no.
California is a community property state, which means that almost all assets acquired or income earned by either spouse during the marriage is considered jointly owned. The same is true for debts accrued during marriage, even if only one person’s name is on the account. The effect of your filing for individual bankruptcy is that all community property is part of the bankruptcy estate, so creditors will be able to seek repayment from a liquidation of any nonexempt community assets. When the case is over, you will receive a discharge that prevents creditors from collecting on any community debt, which also means they can’t go after your spouse once your individual case is over. This protection for your spouse is referred to as a “phantom discharge.”
If you file individually, you will need to disclose your household income, which includes your own income and that of your spouse. A non-filing spouse’s income is used only to calculate whether you pass the means test to qualify for Chapter 7 bankruptcy. If your spouse earns a high income, you may not qualify for Chapter 7 because the law expects spouses to help each other repay most types of debt. If you don’t qualify because of your spouse’s income, then you may be able to utilize Chapter 13 instead.
Property that your spouse owns separately — such as real estate purchased before marriage or an inheritance received at any time —is not community property and so is not part of the bankruptcy estate. It usually is untouchable by creditors but there are exceptions, such as when an asset was used to secure a jointly assumed debt. Your bankruptcy attorney will be able to give you an idea of whether any of your spouse’s separate property may subject to creditors’ actions.
If you file for individual bankruptcy, your spouse’s credit score should remain unscathed, despite the fact that the bankruptcy impacts community assets. Credit bureaus maintain records separately for each individual, so one spouse’s bankruptcy discharge does not necessarily appear on the other spouse’s credit report. However, the report will show debts on which your spouse is a co-borrower.
While this is a general summary about the effect your individual bankruptcy could have on your spouse, every case is different. To get answers specific to your situation, reach out to the attorneys at the Law Offices of Michael Jay Berger in Beverly Hills. Please call 310-271-6223 or contact us online to schedule a free initial consultation.