Many married couples co-manage their finances and taxes. It makes sense then that many couples choose to file for bankruptcy together. When shared debts and property are in the picture, joint bankruptcy may be the only reasonable option.
However, it is possible to file for bankruptcy separately and avoid involving your spouse (as well as his or her assets). After all, the debt is between the creditor and the debtor. If your spouse did not sign a contract making him or herself personally responsible, there may be no reason to include him or her in the bankruptcy case.
There are several factors to consider such as your state of residence, shared property, and exemptions. We’ll go through each of these below, beginning with common law vs. community property states.
Common Law vs. Community Property States
First, determine whether you live in a common law or community property state as this will affect which property is a part of your bankruptcy. Common law property states use equitable distribution while community property states consider the majority of property acquired during the marriage as equally owned by each spouse even if only one spouse is on the title.
The following states are community property states:
- New Mexico
How Do Common Law States Handle Property and Bankruptcy?
In the case of common law states, whatever property has your name on the title or was purchased by you belongs to you. If the property is owned by both you and your spouse, you each own half in most cases. Any of the property that you own yourself or the portion of the jointly owned property may be collected and sold to pay off your creditors under Chapter 7 bankruptcy.
What happens to your spouse’s property in common law property states? This property is not included in a bankruptcy you file by yourself. In the case that you have some nonexempt property, a bankruptcy trustee may sell the entire piece of property to pay off creditors and pay your spouse for his or her half. However, before doing so, the trustee must try to sell only your half if possible and demonstrate to the court the benefit of selling said property.
Is My Spouse’s Property at Risk in a Community Property State?
Yes, in community property states, more of your spouse’s property is at a greater risk when filing for personal bankruptcy. If you choose to file by yourself, you’ll need to ensure you have the right exemptions to protect shared property. In many cases, it is wiser to file with your spouse as some states offer double exemptions on community property to spouses who file together.
You may also be asked to reveal any separate property of your spouse in your bankruptcy papers. This is done to ensure that all property listed as separate is truly owned by the other spouse.
How Will Filing for Bankruptcy Affect My Spouse’s Credit Score?
If you choose to file together, both of your personal credit scores will be affected, and the bankruptcy will be listed on your credit reports. If you file for bankruptcy separately, your spouse’s personal credit score should not be affected. The debt is between you and the creditor. So, unless your spouse signed a contract making him or herself personally liable, the liability falls on you alone.
Even if you decide to file for bankruptcy separately from your spouse, you don’t have to go through the bankruptcy process alone. Tyler, Bartl & Ramsdell, P.L.C. has over 30 years of experience in bankruptcy law and can help you reach a favorable outcome. Contact us today to discuss your case and how to proceed.