“Will bankruptcy affect your spouse? That depends on how much debt you share as a couple.Goldmund Lukic/Getty Images
Your relationship has been a model of marital harmony, with one important exception: finances. The economic downturn took a toll. You were laid off from your job and bills began to pile up. To make matters worse, you got sick and ended up in the hospital for a few days — without the benefit of health insurance. When you did eventually find a job, it was for far less pay than you expected. As bleak as your financial prospects became, the situation was rosier for your spouse.
Your partner’s employment held fast during the Great Recession. Good health prevails and bills are being paid on time. What he or she can’t manage on his or her salary is paying your bills, as well. So you decide to file for bankruptcy. The only question is: How will your bankruptcy affect your spouse’s money?
It all depends on whether you and your spouse entered into joint agreements, whether on bank accounts or loans. If you have a joint checking or savings account, the funds in that account will be fair game during bankruptcy and can be used to pay creditors to satisfy what you owe.
If you and your spouse have a loan in common, you are both liable for the debt. The spouse filing for bankruptcy may be absolved of loan repayment, but the spouse not filing for bankruptcy will still be required to pay back the loan. This goes for any debt you have in common, including credit cards, personal loans, vehicle loans and mortgage loans. If both names are on the loan, the non-filing spouse will be left holding the note. Creditors are legally able to continue to demand payment, and they can report negative credit information or refer the debt to a collection agency.
There is one bright spot: A bankruptcy will not show up on your spouse’s credit report. Your spouse’s credit report will remain unblemished if your spouse continues to make on-time payments on debts [source: Ulzheimer].
As far as property is concerned, any property wholly owned by the non-filing spouse is off limits to creditors. The filing spouse may still have to list the property in a disclosure to the bankruptcy court trustee, who will verify that it is indeed separate property.
Where you live also affects how you and your non-filing spouse’s property is treated during a bankruptcy. You’ll want to determine whether you live in a community property state or a common law property state.
In a common law state, property owned by a non-filing spouse cannot be seized and sold during a bankruptcy to pay creditors. In the case of jointly owned property, the court may sometimes force its sale and then pay the non-filing spouse a portion of the sale earnings. In a community property state, all property becomes part of the bankruptcy, unless the property is wholly owned by the non-filing spouse [source: Bulkat].
Because filing for bankruptcy can have a number of implications for your spouse, it’s best to consult with a bankruptcy attorney before taking action.
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- Bulkat, Baran. "Filing Bankruptcy Without Your Spouse." Nolo. (Sept. 17, 2014) http://www.nolo.com/legal-encyclopedia/filing-bankruptcy-without-spouse-property-debt.html
- Ulzheimer, John. "What Happens to My Debt if My Spouse Files For Bankruptcy." Mint. April 29, 2013. (Sept. 17, 2014) https://www.mint.com/blog/credit/what-happens-to-my-debt-if-my-spouse-files-for-bankruptcy-0413/