If you are married and considering bankruptcy, how it will affect your spouse depends on whether you are filing individually or your spouse is filing with you. This decision can affect your separate and joint debts and your separate and marital property.
Your decision about whether to file bankruptcy separately or together with your spouse depends on carefully considering multiple factors. We address these below.
If you would like to know if bankruptcy is right for your specific situation, please call Stone Rose Law at (480) 739-2448.
Common Considerations in Separate and Joint Bankruptcies
As a general rule, if your bankruptcy is individual in nature, then it usually will not have any effect on your spouse. But this is not an ironclad rule.
- For example, filing separately can still affect your spouse’s credit score. Typically, a spouse’s individual bankruptcy does not appear on the other spouse’s credit report, but mortgage lenders/creditors may still consider the bankruptcy when evaluating joint creditworthiness.
- If your spouse has cosigned or is a guarantor on a debt you have, then filing separately can leave that spouse liable for the debt if you discharge it through bankruptcy.
- Because Arizona is a community property state, even if you file separately, property you and your spouse have acquired during the marriage can still be considered joint property.
- You will also still need to report your spouse’s income when you are qualifying for Chapter 7 bankruptcy through the means test.
Although about two-thirds of bankruptcies involving a married couple are joint filings, there are situations in which it may be better for only one spouse to file. The right choice for you is something that an experienced bankruptcy attorney can help you understand by going through your unique facts.
Here is a summary of some of the most common things your lawyer will go over with you:
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What is the duration of the marriage? |
The shorter the marriage, the less likely marital assets will exist. This tends to favor filing for bankruptcy separately. |
| Who owns the marital debts? | If one spouse owns all or most of the marital debts, then it is often better for that person to file separately if preserving credit is a concern, because each spouse maintains a separate credit report.Joint filing may make a spouse responsible for debt that person did not incur, and may affect the credit score of the spouse who has little or no debt. |
| Does one spouse own a business? | The nature of the business, like a sole proprietorship, a limited liability company, a partnership, or a corporation, can affect the decision to file separately or jointly. |
| Will you be getting divorced? | For a divorcing couple, filing jointly can save money on attorney fees and costs. However, if asset division is a source of disputes, separate filings may be more practical. Chapter 7 will take less time than a Chapter 13 bankruptcy and its three-to-five-year debt repayment plan, which can make getting on with separate lives easier. |
How Bankruptcy Affects Debts and Property Shared With Your Spouse
In a community property state like Arizona, filing for bankruptcy will affect your spouse if your debts are held jointly. In Arizona, many debts incurred during a marriage are considered shared 50-50 between the husband and wife. Your creditors can go after your joint bank accounts, cars, or other property.
What is Community Property?
Under community property law, all property that you and your spouse acquire during your marriage is legally considered to be equally shared. It does not matter if one spouse paid in full for the property. It does not matter if the property is acquired in only one spouse’s name. It is still legally owned 50-50.
The same goes for debts incurred during the marriage. If one spouse incurs a debt, both are equally obligated to pay it, even if the other spouse is not named as an obligor on the debt.
What this means is that if one spouse declares bankruptcy in Arizona, this can affect all the jointly owned property, joint accounts, and debts, even if your spouse does not file with you. All of these must be included in your bankruptcy petition paperwork when you file for bankruptcy.
Examples of marital property in Arizona include:
- Joint bank accounts
- Marital home
- Vehicles acquired during marriage
- Retirement accounts funded during marriage
What is Separate Property?
Generally, your separate property is property that you owned before you got married. This also includes your separate debts. They are yours alone; your spouse is not obligated to pay them.
Other examples of separate property include inheritances you receive while you are married and gifts you receive during the marriage that are intended only for you.
How Bankruptcy Affects Debts With Your Spouse
If you file for bankruptcy, this will not affect your spouse’s responsibility to pay for that person’s separate debts. When you receive your bankruptcy discharge, it will only discharge your responsibility to pay your own debt obligations.
Joint debts remain the responsibility of both you and your spouse. Creditors can still seek payment of joint debts from your non-filing spouse even after your obligation on a joint debt is discharged.
Note, though, that under Chapter 13, your non-filing spouse can be protected by a co-debtor stay. This will remain in effect during the period of your debt repayment plan.
If you do not pay off the joint debt under your repayment plan, a creditor may ask the bankruptcy court to lift the co-debtor stay. Otherwise, your spouse may still be liable to pay off any remaining balance after your Chapter 13 is discharged.
What is a Community Discharge in Bankruptcy?
In a community property state like Arizona, the “community discharge” is a rule that protects community property after one spouse files for bankruptcy and the other spouse does not.
The effect of community discharge is that if you receive a discharge in bankruptcy, your creditors cannot go after the community property that you own with your spouse for older community debts.
Specifically, once you receive a bankruptcy discharge, your creditors are barred from collecting community debts from community assets that existed before you filed for bankruptcy and from community property acquired after the bankruptcy. This remains the case even when the debt itself is not erased for your non-filing spouse.
The community discharge rule does not eliminate the debt. Creditors can still collect against your non-filing spouse’s separate property and enforce debts that are non-dischargeable, like support obligations. Also, if your marriage ends, so does the community discharge protection.
So, for example, let’s say that you file Chapter 7 bankruptcy in Arizona, but your spouse does not. You have some credit card debt that you accumulated during the marriage. You receive a discharge for the credit card debt.
Because of the community discharge, even though the debt still exists, your creditor cannot garnish your spouse’s wages because those are community property, nor can it garnish your community bank accounts. But it still can attempt to collect the debt from your spouse’s separate property.
How Bankruptcy Affects Property With Your Spouse
If you have marital property that you cannot fully protect with a federal or Arizona bankruptcy exemption under Chapter 7, then the bankruptcy trustee may be able to liquidate that jointly-held property. In a community property state like Arizona, the trustee can use all nonexempt community property to pay off your debts.
A Chapter 13 bankruptcy allows you to keep your property. If you want to keep a nonexempt asset in Chapter 13, then you must pay an amount equal to its value in the Chapter 13 debt repayment plan. The bankruptcy trustee will include your interest in nonexempt property in your monthly debt repayment plan.
Ordinarily, your spouse’s separate property is not subject to your separate bankruptcy unless it is commingled with marital assets.
How Does Divorce Affect Bankruptcy and My Spouse’s Property?
Filing for bankruptcy during a divorce can complicate the issue of how it affects your spouse’s property and debts. Here are some important considerations:
The Effect of When You File for Bankruptcy
One of the most important considerations is whether to file for bankruptcy before or after filing for divorce.
Filing for Bankruptcy With Your Spouse Before Getting Divorced
Filing and completing a joint bankruptcy with your spouse before getting divorced can simplify both processes:
- For example, you can save money on court fees and attorney fees. It can also make it easier to divide your assets and debts.
- If you file for divorce more than 180 days after your bankruptcy, then your creditors cannot reach property awarded in the divorce decree.
Filing for Bankruptcy After Getting Divorced
If you begin your divorce before filing for bankruptcy, the type of bankruptcy (Chapter 7 or Chapter 13) you choose can make a difference. One of the most important aspects is how much longer it will take to complete the bankruptcy process through a Chapter 13 debt repayment plan.
Another consideration is that when you file jointly for bankruptcy, you and your spouse must submit your combined income, which in some cases can make both of you ineligible for a Chapter 7 bankruptcy. In this case, you may be better off filing for bankruptcy after your divorce is finalized, so each of you can file individually using your separate incomes.
The Effect of the Automatic Stay
The bankruptcy automatic stay will stop most legal actions you are involved in, including divorce-related financial matters like property division. This stay will remain in place until your bankruptcy case is discharged or dismissed, or the bankruptcy court grants relief.
The Effect on Property Division
Non-exempt assets are subject to liquidation in a Chapter 7 bankruptcy. This can affect what is subject to asset division in the divorce.
The Effect on a Non-Filing Spouse
If you discharge a debt in bankruptcy, because creditors are not bound by divorce court orders, your ex-spouse can still be liable for the underlying debt even if the divorce decree’s asset division provisions assigned that debt to you.
The Effect on Spousal Support Obligations
Spousal maintenance (also known as alimony) and child support obligations are not dischargeable in bankruptcy. This means that past-due and ongoing spousal support obligations will remain after the bankruptcy case is closed and will take priority over most other obligations in a bankruptcy proceeding.
Talk With an Experienced Arizona Bankruptcy Attorney About Filing for Bankruptcy
The question of how an Arizona bankruptcy can affect your spouse’s assets and debts involves multiple layers of consideration. This is why we recommend that, before you make any decision about whether to file separately or jointly, or before or after getting a divorce, you speak with an experienced Stone Rose Law bankruptcy attorney.
In a free initial consultation, we can help you carefully assess your financial situation, including your separate and joint assets and personal and shared debts, and whether you are also undergoing or contemplating a divorce, so you can make the best decision about whether to file for bankruptcy and which Chapter to use.
We can also help you evaluate alternatives to bankruptcy and how they can affect your spouse and your separate and joint property rights.
Call us today at (480) 739-2448 or use our contact form to schedule a free consultation with a skilled Arizona bankruptcy lawyer.
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