It's probably no surprise that you can file a bankruptcy case as a single person. But you can also file with your spouse if you are married. You can also file as an individual, even if you’re married. There are strategic reasons why you might want to do one over the other.
Your decision to file for bankruptcy might have more to do with where you live and what property you and your spouse own than it does with who owes what debt. But to determine your best course of action and whether to file if your spouse doesn't want to, you have to look at the household's overall debt and asset picture for both of you.
As we look at these issues, the principles may be easier to grasp if we use examples. Consider a hypothetical married couple, Mark and Ellen, who resides in Texas—a community property state.
They both have a credit card and medical debt in their own names. They have a joint credit card with a 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.
Going through our example, let's say that Mark files for bankruptcy and Ellen doesn't.
Who Owns the Property?
There's often a lot of confusion about who owns the property when a couple marries. You don’t automatically become a co-owner of the property your spouse owned before you were married. That property will remain your spouses' separate property, even if you live in a community property state.
The only way you can share ownership of property that your spouse owned as a single person will be for your spouse to give—deed—it to you or establish joint ownership (e.g. a bank account). This is especially true in the case of real estate, where you often need your spouse to formally transfer or assign it to you.
Community Property State vs. a Common Law State
Whether you live in a community property state—property acquired during the marriage belongs to both members—can affect how the bankruptcy is conducted. If you and your spouse live in a community property state, your property is a separate entity called the “community.”
You can own property separately that you brought into the marriage, or that you were given or inherited in your name only during the marriage. However, most property acquired during the marriage is considered property of the community.
This affects 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 of the U.S. states are common law states—where property acquired during the marriage solely belongs to the person that bought it. The following are community property states:
- New Mexico
Going back to our example, because 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), and even the income from their jobs.
Community Property 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.
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).
If Mark and Ellen lived in a common-law state, only the property that he owned separately and his interest in the jointly-owned property would become part of the estate if only Mark filed for bankruptcy.
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 bank credit card, the home loan, and his car loan. Ellen is liable on her credit cards and medical debts, the 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 that is liable for it.
There are a few exceptions that usually arise when the non-filing spouse gets the benefit when the debt was used to acquire necessities.
Debts 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.
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 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 bank on the credit card was discharged, but Ellen’s wasn’t. If the bank wants to collect from Ellen, they 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 this provision. In those states that do, some apply it only for 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 a state, rather than the federal, exemption). It 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 is called the co-debtor stay. However, only for those debts that she shares with Mark fall under the provision.
In our example, the co-debtor stay would be limited to the home mortgage and the 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 five years.
As soon as Mark receives his discharge, the co-debtor stay will lift, and the mortgage creditor and the bank will be free to act against Ellen personally, but not necessarily against the property (see the community discharge, discussed above).