Even if you file an individual bankruptcy, your spouse may still be affected. How you and your spouse's debts and property are treated in your bankruptcy depends on whether you live in a community or common law property state. Read on to learn more about what happens to debts and property when you file without your spouse and what that means for him or her.
The laws of your state affect what rights you have in property acquired during marriage. Common law property states follow the rules of equitable distribution. Community property states deem most property acquired during the marriage to be equally owned by both spouses regardless of who is on title. What property is considered part of your bankruptcy depends on whether you live in a common law or community property state.
To find out if you live in a community property state and for more information on the differences between common law and community property, see Separate and Community Property During Marriage: Who Owns What?
These states apply common law principles to property ownership. This usually means that if you are on title to a property or bought it yourself, then it's yours. If you own it jointly, each spouse owns half unless designated otherwise.
In a common law property state, your separate property (property you own individually without your spouse) and your portion of any jointly owned properties become part of your bankruptcy. This means that if you do not have enough exemptions to cover these assets, then they can be taken and sold by the Chapter 7 bankruptcy trustee to pay your creditors.
Your spouse's separate property and his or her share of joint property are not included in your bankruptcy. However, if you have nonexempt joint property, the trustee can still force the sale of the entire asset to get to your portion (although the trustee must pay your spouse his or her portion). Before doing this, the trustee must usually try to partition the property to sell only your share if possible. If it cannot be divided, the trustee must show that the benefit of selling the property outweighs the detriment to the co-owners.
Your bankruptcy discharge eliminates your obligation to pay your dischargeable separate debts and joint debts. Your discharge does not affect your spouse's responsibility toward any joint debts. This means that your spouse is responsible for paying back his or her separate debts and is still on the hook for any joint debts you had together.
In community property states, unless agreed to otherwise, both spouses jointly and equally own most property acquired during the marriage in its entirety even if only one spouse is on title.
All community property is part of your bankruptcy even if you file without your spouse. So more property is at risk when you file alone in a community property state than if you file in a common law state. Before filing, you need to make sure that you have enough exemptions to protect all community property. Some states allow you to double your exemptions if you file with your spouse. If you cannot exempt all community property by yourself and you are allowed to double your exemptions in a joint filing, it may be better to file with your spouse. See Nolo's section on Bankruptcy Exemptions to learn more about how your property is protected.
Just like common law states, the separate property of your spouse is not part of your bankruptcy. However, you may still be required to disclose it in your bankruptcy papers because the trustee may want to check and make sure it is, in fact, separate property.
Same as common law property states, only the spouse filing bankruptcy gets a discharge. The non-filing spouse is still liable for his or her separate debts and joint debts. However, the non-filing spouse receives an additional benefit in community property states.
All dischargeable community claims get discharged with respect to community property. This means that all community property, which is also owned by the non-filing spouse, is off limits to the discharged creditors (they can still go after the non-filing spouse's separate property if he or she was also liable on the debt). This benefit to the non-filing spouse is sometimes called a phantom discharge and it lasts as long as both spouses are alive and still married.
Certain states allow married couples to hold property in tenancy by the entirety as a single marital entity. Depending on your state, tenancies by the entirety may be exempt in bankruptcy when only one spouse files, but fair game if both spouses file.
To learn more about other bankruptcy options for married couples, see our articles in Filing Considerations for Married Couples.