My spouse is declaring bankruptcy. Should he file alone or should we file together?

spouse bankruptcy consumer bankruptcy

My spouse is declaring bankruptcy. Should he file alone or should we file together?

Whether married couples should file a joint petition or a single one depends on various factors: type of property, the amount of community debt involved, and how the property is held (e.g., community, joint tenancy, or tenancy by the entirety). One factor is that a co-debtor may receive a stay even if the other debtor cannot get a stay

Filing together eliminates the separate debts of you and your spouse and all the jointly-held marital debts. Filing alone leaves the non-bankrupt spouse still liable for his or her share of joint debts, but wipes out the spouse’s separate debts and his/her share of the joint debts.

If you are legally separated, have divided your property, and taken care of all the financial considerations, your best option may be to have your spouse go it alone. If all the debts were incurred before you were married, there is no point in having you both file.

Community property and common law (also called “equitable distribution”) are the two types of martial property ownership. The vast majority of states apply the equitable distribution rules; nine states apply the community property rules. If you live in a common law property state, your spouse’s bankrupt estate will include his/her separate property and half of the jointly-held marital property. The non-bankrupt spouse will not have to worry about the effects of the bankruptcy on his or her separate property.

However, the bankruptcy court takes a dim view if the non-bankrupt spouse is merely holding the property or has received the property from the bankrupt spouse within one year of filing bankruptcy. In this case, this transaction is considered fraudulent, and the property will be turned over to the bankruptcy trustee.

In community property states, spouses equally own all property earned or received during the marriage, splitting 50-50. In bankruptcy, then, all the community property you and your spouse own jointly is part of the bankruptcy estate, regardless whether you join in the filing. Your separate property — property you owned before the marriage — is not effected by your spouse’s bankruptcy. Property held by your spouse will be used to settle debt first, and then non-exempt community property will be used.

Do no rely solely on general explanations of the rights and liabilities of married persons in your bankruptcy planning. The normal rules may not apply, or they may apply in modified form, in a bankruptcy case. To give one example out of many, creditors of one spouse cannot ordinarily dispossess the other spouse from property they hold as tenants by the entirety. But a bankruptcy trustee may be able to.

(Reviewed 11.14.08)

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