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Filing Bankruptcy without Your Spouse in California, Part 2

Community DebtIn my last blog post I discussed how, in a community property state like California, property in a marriage is either "community property" or "separate property," and how those types of property are treated if only one spouse files bankruptcy. The couple's entire community property is included in the individual spouse's bankruptcy (not just that spouse's half of it), as is his or her separate property.

The bottom line of that last blog post was that filing bankruptcy individually (instead of both filing jointly) generally only makes sense—at least from a property perspective—when the non-filing spouse has some separate property to keep out of the bankruptcy. It's also important that the filing spouse's separate property as well as the community property and can be protected by property exemptions.

Beyond this property perspective, it's crucial to consider how such a bankruptcy by one spouse would treat the debts of the spouses. That is the subject of this blog post.

WHY WOULD ONLY ONE SPOUSE WANT TO FILE A SEPARATE BANKRUPTCY?

Beyond protecting the non-filing spouse's separate property mentioned above, practically speaking, the impulse to file a separate bankruptcy often arises when one spouse has incurred most of the debts. This often happens when one spouse has operated a business which ran up a lot of debt in that spouse's name before it failed. Sometimes one spouse takes on most of the debt because he or she is the one who has better credit, or incurs debt without the other spouse knowing, for whatever honorable or not so honorable reasons. Or one spouse enters the marriage burdened by much more debt than the other.

In all these situations it's understandable that one or both of the spouses don't want to make the one who has no debts or relatively few debts join in a bankruptcy which would not directly benefit that person and would hurt his or her credit.

Indeed, having only one spouse file bankruptcy may enable the other spouse to keep his or her credit unscathed. So he or she could make credit purchases during and after the other spouse's bankruptcy case. Also, the couple may be able to make joint credit purchases more quickly after the one spouse's bankruptcy is finished, with the non-filing spouse in effect co-signing with the other spouse. That could enable the one who filed the bankruptcy to rebuild his or her credit faster.

So having only one spouse file bankruptcy can directly help the non-filing spouse, can potentially help them as a couple, and also possibly help the filing spouse as well.

SO IS THERE ANY DANGER IN ONLY ONE SPOUSE FILING BANKRUPTCY?

Yes, the danger is that in certain circumstances the non-filing spouse may be personally liable on debts that were incurred by the other spouse alone, and so the non-filing spouse could be left owing some of the debts after the other spouse's bankruptcy is completed. Under California Family Code Section 913, a spouse is personally liable for the debts incurred by the other spouse for the necessities of life, while being married. Creditors rarely pursue collection efforts on the basis of holding the spouse personally liable for the debts incurred by the other spouse for the necessites of life.

Further there is a third party in this equation, the marrital community. The martial community generally consists of the assets, income and property that are acquired during marriage. That's because in a community property state like California (as well as in the neighboring states of Nevada and Arizona, but not Oregon), the debts incurred by one spouse during the marriage are generally legally owed by the marital "community." This is usually true regardless whether the debt was entered into and signed by only one spouse. So outside of bankruptcy, the creditors of one spouse can often go after the income and assets of the married couple—the community property—though not necessarily against the other spouse personally.

Yes, this can be confusing. Let me explain.

SO ARE THERE COMMUNITY DEBTS AND SEPARATE DEBTS?

Yes, just as there is community property and separate property in California (see my last blog post), there are community debts and separate debts.

Community debts include those explicitly entered into by both spouses together—a mortgage, vehicle loan, or credit card signed by both—as well as those described in the paragraph immediately above, those entered into by one spouse during the marriage but owed by the marital "community".

Separate debts include those incurred by one of them before the marriage or after a legal separation or divorce.

SO CAN I FILE BANKRUPTCY BY MYSELF AND PROTECT MY SPOUSE FROM OUR COMMUNITY DEBTS?

The good news is "yes." In a community property state like California, for most practical purposes all eligible community debts are discharged—legally written off. (By "eligible" there, I mean those that can be discharged under the bankruptcy laws—excluding recent taxes, fraudulent debts, and such.)

As stated earlier, when you file a bankruptcy all of your community property is included in your bankruptcy case, and is either protected through property exemptions or (seldom) the portion not protected goes to the bankruptcy trustee for distribution to your creditors. Then after your debts are discharged (both separate and community debts), all community property that you and your spouse acquire after the filing of your bankruptcy case is protected from the creditors owed community debts. (See Section 524(a)(3) of the U.S. Bankruptcy Code.) To emphasize, this is true even if you file the bankruptcy case without your spouse.

CONCLUSION

There are many factors involved in the decision to file bankruptcy with or without your spouse. The two biggest are debt and property factors, discussed in this and the most recent blog post. If you have reasons why one spouse can't or doesn't want to file, or if the debts and/or property are lop-sided between the two spouses, you definitely should get solid legal advice to explore how the principles presented here would play out for you.

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