Can I File Bankruptcy Without My Spouse?
You can file a bankruptcy case as a single person. You can file with your spouse, if you’re married. Or you can file as an individual, even if you’re married. There are strategic reasons why you might want to do one over the other, which we’ll explore below.
Your decision to file might have more to do with where you live and what property you and your spouse own that who owes what debt. But to determine your best course of action and whether to file if you spouse doesn't want to, you have to look at the overall debt and asset picture for both of you.
Mark and Ellen
As we look at these issues, the principles may be easier to grasp if we use examples. Consider Mark and Ellen, who live in Texas, a community property state. They both have credit card and medical debt in their own names. They have a joint credit card with First Bank. They also jointly own their home and both signed the mortgage. In addition, they each separately purchased and financed a car during the marriage.
Who Owns the Property?
There's often a lot of confusion when a couple marries over who owns the property. You don’t automatically become a co-owner of the property your spouse owned before you were married. That property will remain your spouses’s separate property, even if you live in a community property state. The only way you can share ownership of property your spouse owned as a single person will be for your spouse to give it to you or, especially in the case of real estate, formally transfer or assign it to you.
Community Property States and Common Law States
Whether you live in a community property state can affect how the bankruptcy is conducted. If you and your spouse live in a community property state, your property is separate entity called the “community.” You can own property separately that you brought into the marriage or that you were given or inherited during the marriage, but most property acquired during the marriage is considered property of the community. This is affect what property becomes part of the bankruptcy estate, whether the trustee can take the property to pay creditors, which debts will be discharged, and who gets the benefit of the discharge.
The list of states that recognize community property is relatively short (the rest are called “common law” states):
- New Mexico
Since Mark and Ellen live in Texas, a community property state, all the property they've acquired since they married is part of the community. This includes their home, their cars (even though they separately owe for the car loans), even the income from their jobs.
How Is Community Property Treated in a Bankruptcy Case?
Even though Ellen doesn't file bankruptcy, all the community property including her interest in the community becomes a part of the bankruptcy estate. If Mark and Ellen lived in a common law state, only the property that he owned separately and his interest in jointly owned property would become part of the estate. Because they're in a community property state, community property that is not exempt (protected in the bankruptcy) could be seized by a trustee and sold to benefit Mark's creditors. If Ellen chooses to file bankruptcy also, depending on the state she can apply her own set of exemptions (which could effectively double the amount of exemptions for the community).
Who Owes the Debt?
There's also a lot of confusion among married couples as to who’s responsible for what debts in a marriage. Marrying someone does not mean that you’ve suddenly taken on your spouse’s financial responsibilities. The debt remains the responsibility of the one who originally contracted for it. You’re only responsible for debt that you entered into yourself or debt that you entered into jointly (whether or not you’re married).
Therefore, Mark is liable on his credit card and medical debts, the First Bank credit card, the home loan, and his car loan. Ellen is liable on her credit cards and medical debts, the First Bank credit card, the home loan, and her car loan.
Does “Community Debt” Exist?
Although some people also refer to debts incurred during the marriage as community debts, there really is no such thing. The spouse that incurs the debt is the one liable for it, with few exceptions that usually arise when the non-filing spouse gets the benefit when the debt was used to acquire necessities.
What Debts Are Discharged in a Bankruptcy Case?
If Mark files alone, the discharge only applies to his liability for his separate debts and his community debts. Ellen’s personal liability is not affected. Her creditors can collect from her after Mark’s bankruptcy.
To learn more about discharge of debts in bankruptcy, read Discharging Debts: General Discharge vs. Dischargeability.
The “Community Discharge”
Even if Ellen does not file, she may obtain some measure of protection from the “community discharge.” After Mark obtains a discharge, his creditors cannot cannot take any action against the community property they owned when the bankruptcy was filed or any community property acquired after the bankruptcy is filed.
For example, when Mark filed bankruptcy, his liability to First Bank on the credit card was discharged, but Ellen’s wasn’t. First Bank wants to collect from Ellen. First Bank could file a lawsuit against her, but they will not be able to use the judgment to collect against any property the community acquired after the bankruptcy case was filed, including Ellen’s wages.
What about non-community property states? The community discharge is not available in non-community property states. If Mark and Ellen lived in one of those states, the joint creditor would be able to reach and force the sale of property that the couple owned jointly unless the state recognized a form of ownership called “tenancy by the entirety.”
Tenancy By the Entirety
Tenancy by the entirety is a form of property ownership. Not all states recognize it. In those that do, some apply it only to real property, while others apply it to personal property as well. The owners must be married (or in some cases, registered domestic partners) and must have acquired the property at the same time. This property is exempt in a bankruptcy case (if the filing party chooses state, rather than federal, exemptions) and cannot be reached by a bankruptcy trustee except to satisfy joint debts.
The same is true for creditors. Creditors cannot force the sale of “entirety” property unless the parties are both liable on the creditor's debt..
The Co-Debtor Stay
Ellen will also enjoy some protection from creditor action while Mark is in bankruptcy. When Mark files his case, he’s protected from creditor collection action by the automatic stay. Even though Ellen is not in bankruptcy, she is also protected by what we call the co-debtor stay, but only for those debts she shares with Mark. In our example, the co-debtor stay would be limited to the home mortgage and the First Bank credit card. For the most part, those creditors would not be able to take any action against Ellen or against the property as long as Mark is in bankruptcy.
(A Chapter 7 case usually lasts about four to six months; a Chapter 13 case is three to give years.) As soon as Mark receives his discharge, the co-debtor stay will lift, and the mortgage creditor and First Bank will be free to act against Ellen personally, but not necessarily against the property (see the community discharge, discussed above).