It is normal for you to be able to file for bankruptcy as an individual, but you can also file with your spouse if you are married. You can also file as an individual, even if you are married. There are strategic reasons for each option.
Example of the Case
Let’s assume there is a married couple, Mark and Ellen, who live in Texas – a state that is considered community property. Both have credit cards and medical debts in their own names. They have a joint credit card with a bank. They also own a home together and have signed the mortgage. Additionally, each of them has purchased and financed a car separately during the marriage.
Who Owns the Property?
There is often a lot of confusion about who owns property when a couple gets married. You do not automatically become a co-owner of the property that was owned by your spouse before marriage. That property remains separate property belonging to your spouse, even if you live in a community property state.
The only way you can share ownership of property that was owned by your spouse as an individual is if your spouse gives you that property or creates a joint ownership (like a bank account). This is especially true in the case of real estate, where you often need your spouse to officially transfer or assign it to you.
Community Property State vs. Uniform Law State
Whether you live in a community property state – where property acquired during marriage is considered to be owned by both spouses – or in a uniform law state, it affects how bankruptcy proceedings are handled. If you and your spouse live in a community property state, your property is treated as a separate entity called “community.”
You can own property separately that you purchased before marriage, or that was gifted or inherited to you in your name only during marriage. However, most property acquired during the marriage is considered community property.
These details affect what property becomes part of the bankruptcy estate, whether the trustee can seize property to pay creditors, which debts will be discharged, and who will benefit from the bankruptcy.
Who is Responsible for Debts?
There is also a lot of confusion among married couples about who is responsible for debts in the marriage. Marrying someone does not necessarily mean you suddenly take on their financial responsibilities.
Mark is responsible for his credit card and medical debts, bank credit card, home loan, and his car loan. Ellen is responsible for her own credit cards and medical debts, her bank credit card, home loan, and her car loan.
Are There “Joint Debts”?
While some people also refer to debts incurred during marriage as “joint debts,” there is actually no such thing. The spouse who incurs the debt is the one responsible for it.
There are some exceptions that usually arise when the non-filing spouse benefits from the debt being used to acquire necessities.
Debts Discharged in Bankruptcy
If Mark files for bankruptcy alone, the bankruptcy only applies to his responsibility for his own debts and community debts. Ellen’s personal liability is not affected. Her creditors can still collect from her after Mark’s bankruptcy.
Community Bankruptcy
Even if Ellen does not file for bankruptcy, she may receive some protection from “community bankruptcy.” After Mark receives bankruptcy relief, his creditors cannot take action against the community property they owned at the time of the bankruptcy filing or any community property acquired after the bankruptcy filing.
For example, when Mark filed for bankruptcy, his liability for the credit card was discharged, but Ellen’s liability was not discharged. If the bank wanted to collect the amount owed from Ellen, it could sue her, but it would not be able to use the judgment to collect any property acquired by the community after the bankruptcy filing, including Ellen’s wages.
What
About states that are not community property states? Community bankruptcy is not available in states that are not community property states. If Mark and Elin live in one of those states, the joint creditor will be able to access the jointly owned property the couple shares, unless the state recognizes some form of joint ownership known as “tenancy by the entirety.”
Tenancy by the Entirety
Elin will also enjoy some protection from creditor actions during Mark’s bankruptcy. When Mark files his case, he is protected from creditor collection actions by the automatic stay. Although Elin is not in bankruptcy, she is also protected by what is called “common tenancy.” However, this only applies to those debts that she shares with Mark.
In our example, common tenancy would be limited to the mortgage on the house and the bank credit card. In most cases, those creditors will not be able to take any action against Elin or the property as long as Mark is in bankruptcy.
Note: Chapter 7 cases typically take about four to six months, while Chapter 13 cases take three to five years.
Once Mark receives the bankruptcy discharge, the common tenancy will be lifted, and the mortgage and bank creditors will be free to take action against Elin personally, but not necessarily against the property. (See community bankruptcy mentioned above).
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Sources:
– Internal Revenue Service. “Internal Revenue Manual 25.18.1.2.2.”
– United States Code. “11 USC §541.”
– United States Code. “11 USC §524.”
– U.S. Bankruptcy Court, Northern District of Illinois. “Tenancy by the Entirety in Bankruptcy,” Page 1.
– United States Code. “11 USC §1301.”
– United States Courts. “Discharge in Bankruptcy—Bankruptcy Basics.”
Source: https://www.thebalancemoney.com/can-i-file-bankruptcy-without-my-spouse-4156807
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