How Bankruptcy Affects Your Spouse
When you file for bankruptcy in California, only your financial liabilities are affected, unless you file jointly with your spouse.
A lot of bankruptcy attorneys advise against filing jointly whenever possible. Doing so shields your spouse’s credit score and can help you re-establish credit by letting your spouse co-sign on new debts.
However, in community property states like California, all property and debt acquired during a marriage is considered shared by both spouses, even if one party paid for all or most of it. It's crucial to understand this when considering bankruptcy, as it can influence how your assets are treated in the process and your eligibility for different types of bankruptcy.
Chapter 7 Considerations
In Chapter 7 bankruptcy, also known as liquidation bankruptcy, your assets are sold off to pay back creditors. However, there are exemptions in place that allow you to keep certain things like clothing and other items necessary for daily living. To qualify for filing under this chapter, you need to pass a means test, which takes into account your household income and expenses.
If you file jointly with your spouse, their income will also be included in the means test. This could potentially disqualify you from filing under Chapter 7 if your combined income is above the state median. In this case, it may be more beneficial to file separately to avoid being dismissed from Chapter 7 eligibility.
If you file for Chapter 7 bankruptcy as an individual, your spouse's income will not play a role in determining your eligibility or the exemptions you are entitled to.
What About Your Spouse's Credit Score?
When you file for Chapter 7 bankruptcy individually, it won't directly impact your spouse's credit score. Credit scores are individual, and bankruptcy won't appear on your spouse's credit report if they didn't file with you. However, it's important to remember a couple key points:
If you and your spouse have joint debts and you file for bankruptcy alone, your spouse will still be responsible for paying off these debts. If these joint debts aren't paid, it could negatively affect your spouse's credit score.
Even though Chapter 7 bankruptcy won't directly affect your spouse's credit score, it can indirectly affect you and your spouse's ability to qualify for new credit. Lenders often consider the couple's overall financial situation when making lending decisions. So, if one spouse has filed for bankruptcy, it could make it harder for the couple to qualify for new credit, even if the other spouse has a good credit score.
Chapter 13 Considerations
In Chapter 13 bankruptcy, also known as reorganization bankruptcy, you create a repayment plan to pay back creditors over a period of three to five years. Similar to Chapter 7, if you file jointly with your spouse, their income will be included in the means test and could affect your eligibility for this chapter.
However, filing jointly may also have its advantages. If your combined income is too high for Chapter 7, filing under Chapter 13 may be the better option for you overall. Additionally, if you have joint debts that you want to include in your repayment plan, filing jointly can simplify the process.
What About Your Spouse's Credit?
Just like in Chapter 7 bankruptcy, if your spouse doesn't file with you under Chapter 13, their credit score won't be directly affected. However, the same indirect effects may still apply.
It's important to note that if you're filing jointly under Chapter 13 and your spouse has separate debt they want to address, they may need to file for individual bankruptcy. This could potentially have a different impact on their credit score and financial situation.
Joint Debts and Community Property Protection
If you have joint debts with your spouse, they will still be responsible for those debts even if you file for bankruptcy. This means that creditors can still go after them for payment.
This may seem unfair to your spouse, but there are ways to protect their assets and credit during the bankruptcy process.
One option is to file separately from your spouse and only include your own individual debts. This will protect your spouse's assets and credit score from being affected by the bankruptcy.
Another option is for you to file jointly, but also apply for a “spousal protection” or “innocent spouse” provision. This means that your spouse can be protected from any creditors trying to collect on your joint debts, as long as they didn't benefit from or participate in the acquisition of those debts.
There's also some protection for the non-filing spouse in community property states. Community property assets cannot be used to pay off the discharged debt. It's important to remember, though, that this protection ends upon divorce or death.
It's important to note that even if you file separately or include a spousal protection provision, your spouse may still be affected indirectly. For example, if you have joint bank accounts and one is closed due to bankruptcy, it could affect their access to funds. It's essential to discuss all of these potential consequences with your spouse and a bankruptcy attorney before filing.
Seek Legal Advice
Figuring out how to minimize the financial damage in filing for bankruptcy requires knowledge and strategy. Navigating bankruptcy laws can be complex because they vary by state, and every case is unique. That's why it's crucial to consult with an experienced bankruptcy attorney who understands how state laws apply to your specific situation.
At the Law Office of Robert L. Firth, we're here to provide guidance on the best course of action and help you navigate the bankruptcy process with confidence and precision.
It's essential to consider the impact on income, joint debts, and property ownership, when you're weighing the choice of whether to file together or separately. Our firm is here to ensure you make informed decisions and understand the specific laws applicable to your situation. Our main office is in Cathedral City, California, and we serve clients throughout Palm Springs, Palm Desert, Desert Hot Springs, Rancho Mirage, and the Coachella Valley.