I am separated from my husband. If I file for bankruptcy will it affect his business?

If you are separated from your spouse, whether your bankruptcy filing will affect his or her business depends on a number of factors.

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Question

My husband started a business while we were married. But now we are separated. If I file for bankruptcy, will it affect his business?

Answer

If you are separated from your husband, whether your bankruptcy will affect his business will typically depend on whether:

  • you have an ownership interest in the business
  • the business owes you money, and
  • you live in a common law or community property state.

To learn more about what to consider before filing for bankruptcy, see our topic area on Bankruptcy Filing Considerations.

Common Law Property States

Most states follow the common law rules of property ownership. Under the common law, if one spouse acquires property during the marriage and puts only his or her name on the deed or other ownership document, the asset belongs to that spouse alone. If both spouses are on title, they own the property jointly.

If your husband started the business on his own and placed all shares and assets of the business under his name alone, then you probably don’t have any ownership interest in his business. If you file for bankruptcy, you would not have to list the business as an asset and it will likely not affect your husband’s business.

For more information, see Marriage & Property Ownership: Who Owns What?

Community Property States

A minority of states follow the community property system. In community property states, almost all property acquired by either spouse during the marriage is considered community property. Both spouses have an equal ownership interest in community property regardless of which spouse is on title to the asset.

If your husband started his business while you were married, you will typically have a community property interest in the business. If you file for bankruptcy, you will need to list your community property interest as an asset in your bankruptcy paperwork. Unless you can fully exempt your ownership interest in the business, a Chapter 7 bankruptcy trustee may be able to go after your business interest to pay your creditors.

To learn more about how to protect your property in bankruptcy, see our Bankruptcy Exemptions topic.

Did You Transfer Property or Incur Debt to Fund the Business?

If you transferred any property or incurred debt (for example if you used your credit card to pay business expenses or cosigned business obligations) to fund your husband’s business, then the trustee can argue that you have an ownership interest in the business or that the business owes you money. If the business owes you money, it will be treated as an asset in your bankruptcy. If you can’t exempt the amount of money owed to you, the trustee might look to your husband’s business to collect those amounts to distribute to your creditors.

In addition, if you discharge (eliminate) your liability for a business credit card or line of credit in bankruptcy, that creditor might decide to close the account or reduce the line of credit which can hurt your husband’s business.

Talk to a Bankruptcy Attorney

As we discussed, whether filing for bankruptcy will affect your husband’s business depends on several factors. Further, your state might have additional rules regarding what the trustee can do depending on how your husband’s business is structured and whether he has any other partners or shareholders. For this reason, consider talking to a knowledgeable bankruptcy attorney in your area before filing your case to learn about all potential consequences.

by: , Attorney

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