Bankruptcy Law Blog

Wednesday, September 21, 2016

Filing Bankruptcy as an Individual When You're Married

How will my spouse be affected if I file for individual bankruptcy?

If you are married and file for individual bankruptcy, your spouse may also be affected. The results will be different if you reside in a community property state or if you live in a common law property state like Alabama. In the latter case, your bankruptcy follows the rules of equitable distribution.

There are a great many complexities involved in filing for personal bankruptcy. The decisions made, such as whether to file individually or jointly as a married couple, and whether to file Chapter 7 or Chapter 13, may have serious consequences for both parties. It is crucial that you consult with a knowledgeable bankruptcy attorney, an expert in the field, who can help to guide you through the process so you achieve the best possible outcome.

Common Law Principles Apply to Property Ownership

In common law states, if your name is on the title to a property, it belongs to you. If you own it jointly with your spouse, you each are entitled to half its value, unless there is some other legal stipulation. What this means is that if you file for individual bankruptcy the property or portion of the property you own can be taken and sold by the bankruptcy trustee to pay your creditors. Any property that your spouse owns individually will not be included in your bankruptcy proceedings.

Unfortunately, if you share nonexempt property that you own jointly, the trustee can force the sale of the entire asset in order to obtain your portion. Your spouse will be paid for the portion he or she owns. The trustee is, however required to attempt to partition the property for sale so that only your property will be sold. If the property can't be split for sale, the trustee must show that selling the property will provide more benefit than detriment to you and your spouse.

If you file for bankruptcy individually are your spouse's debts discharged, too?

No. Your bankruptcy only discharges your separate debts and your portion of joint debts. Your spouse is still responsible for his or her separate debts and for his or her portion of your joint debts.

What happens in community property states?

In community property states, both spouses own most property jointly and equally no matter whose names are on the title. Also, in community property states, all marital property is part of your bankruptcy even if you file individually. This means that more property is at risk when you file individually in a community property state than if you file in a common law state.

On the other hand, while the non-filing spouse in a community property state is still liable for his or her separate debts and joint debts, all dischargeable community claims get discharged as community property. The advantage to the non-filing spouse is that his or her debt on community property is not accessible by creditors as long as the spouses stay married and the filing spouse remains alive.

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