Bankruptcy when married
What happens if you file bankruptcy when married ?
If only one spouse is in debt or in need of bankruptcy relief, only that spouse should file. It may seem obvious, but there’s generally no reason to torpedo both the filing and the nonfiling spouse’s credit score unless there is a reason. Where I practice bankruptcy law (in California), it’s at least remotely possible that creditors could go after the non-filing spouse for “community debts” if the creditor is shrewd about applying the Family Code. In the 20+ years, I’ve been in bankruptcy practice though, I have yet to experience a creditor trying this approach with any of my clients’ spouses. But I do know it’s been done.
“I’m married. My spouse is filing. Do I have to file with him/her?” No. See above.
How will assets, credit score, and access to my credit card accounts be affected if my spouse files bankruptcy?
In general, the filing of bankruptcy by one spouse will not automatically and adversely affect the other’s assets, access to credit including credit rating. A consumer’s credit score and credit history is his / hers alone. Most creditors do not attempt to collect from someone who is not the borrower of record, i.e. signed the application for the loan or credit card because it’s too much additional work and the result for the creditor is often uncertain even in community property states. Pay careful attention to credit cards held jointly, though. Obviously if after the bankruptcy you and your spouse apply for joint credit, there is an impact. The card issuer may cancel and close the entire account or only as to the spouse filing bankruptcy.
Does one spouse’s bankruptcy filing change the character of joint debts? The short answer is no. A debt that was joint prior to the filing of the bankruptcy is afterward the debt of just the nonfiling spouse. There is a difference in how this subject is treated in a Ch. 13 versus a Ch. 7. But keep in mind that although 25% of bankruptcies are filed as Ch. 13s, only about a third of those cases actually survive the Chapter 13 plan and get a discharge. So in about 7.5% of the bankruptcy cases, the difference ultimately matters. A Ch. 13 reorganization allows the filing spouse’s Plan to determine which creditors get paid and how much. A Ch. 7 bankruptcy doesn’t confer this benefit on the nonfiling spouse.
“The state I live in is a community property state. Does that make a difference? If so, how?” There are nine community property states: California, Arizona, Wisconsin, Idaho, Nevada, Louisiana, New Mexico, Washington, and Texas. I’m only licensed to practice in California so I won’t pretend to be familiar with the state-by-state nuances of the other states in that list. But some characteristics are shared among them all. Generally, in a community property state, assets acquired during the marriage with earnings are owned equally by the husband and wife. Likewise, debts incurred during the marriage are owned equally by husband and wife. In California, community property is “liable” for the “separate property” debts of either party.
Here’s a classic example, taken from a real case: Man gets divorced, falls behind on his child support to the tune of $20,000. He remarries and, with his new wife, buys a home. His former wife puts a lien on that home for the $20,000 owed. Valid lien? You bet, at least in California. This is obviously a very big deal and triggers the need for smart planning by the bankruptcy lawyer. It’s also a trap for the unwary. Say the divorced-and-remarried man in our story decided to quitclaim the home to his new wife in order to avoid a lien. Probably a very bad move in the context of either bankruptcy or Family Court. Bankruptcy law doesn’t trump state law as to the nonfiling spouse nor as to community property held by the debtor (the spouse who filed bankruptcy) with the nonfiling spouse! This same theory can be applied to any community property asset, whether it’s a bank/credit union/brokerage account or motor vehicle, to name just of few of the most commonly held community assets.
I Get Harassing Calls and Dun Letters from Collection Agencies Regarding My Spouse’s debt. Is there anything I can do?
Collection agencies are a species so unique that they have their own federal act defining how they may – and may not – behave The Fair Debt Collection Practices Act [FDCPA]. And in California, consumers also have the additional protection of the Rosenthal Act, which essentially takes much of the FDCPA and applies it not just to collection agencies (“debt collectors”) but also to the original creditors, often an in-house collection department of the creditor. Neither you nor your spouse has to be in bankruptcy to invoke these laws.
How do you do that, make creditors stop?
Practically speaking, it’s usually more effective to (1) dispute the debt with the collector – demand written proof the debt is owed; (2) secondly, if the debt is owed only by your spouse, you may demand that the collector cease all contact with you.
It’s especially offensive when the person owing the debt has filed bankruptcy and the collectors keep calling. Most of them know better and abide by the law. There are exceptions. While the bankruptcy case is ongoing, the spouse who filed may ask the Court to sanction the creditor for a violation of the “automatic stay”, the rule which as part of Bankruptcy Code Section 362 says creditors must cease all attempts to collect from the spouse who filed. If a creditor persists in this behavior – calling, writing, demanding payment – after the bankruptcy case is closed and the discharge has issued, the creditor may be sanctioned for a “discharge violation.” For you to know these rights and just threaten to invoke them is usually enough to make any sane creditor abandon all attempts to collect.
May I Keep My Bankruptcy Filing a Secret From My Spouse?
Maybe. If there are any debts jointly owned with your spouse, that must be disclosed in your bankruptcy filing and the “co-debtor” spouse is entitled to notice of the proceedings. If there are no joint debts, you may skirt the requirement to disclose, at least in a Ch. 7. In Chapter 13, though, which drags on for years, it’s practically impossible to hide it. Wage garnishment and the surrender of tax refunds are common mechanisms to pay the Ch. 13 plan. Do we really think the nonfiling spouse isn’t going to notice? But the practical answer is that it’s not a good idea to hide your bankruptcy even if you could get away with it. Mailings from the bankruptcy court will come to the address you give the Court. If that’s your home, OOPS! You don’t need rocket science or even this article to know that keeping such a secret could ultimately have a significant and negative effect on your marriage.