Bankruptcy for a Married Person: Should You File as an Individual, or as a Couple?

Posted on June 24, 2013 · Posted in Bankruptcy

Couple with pets

A common question from a married person is: can I file a bankruptcy case alone, or do I need to file with my spouse?

A married person may file a bankruptcy case as an individual or as part of a joint petition.  When filing as an individual, all of the couple’s community property will become property of the bankruptcy estate.

California is a “community property” state.  In a nutshell, this means that:

  • All income earned by either spouse is community property
  • All property acquired during the marriage is presumed to be community property
  • All debts incurred by either spouse during the marriage are presumed to be community debts

A married person can have “separate property” which is not jointly owned unless that person wants to change it into community property, or give some portion of it to the spouse.  Separate property may exist if:

  • A person owns the property prior to the marriage, and does not change its character (i.e., by transferring title to the spouse or the couple)
  • The couple entered into a pre-nuptial agreement designating certain other property as separate property (i.e., the income of one or both spouses)
  • A married person acquires property through a gift or inheritance during the marriage

So the first step in evaluating how to proceed with a bankruptcy case is to ask: is all the property owned by either spouse community property?  If so, then all of the property becomes part of the bankruptcy estate (is reported in the bankruptcy).  In that case, the couple can file a joint case, or spouse can file an individual case.  If one spouse files for bankruptcy and receives a discharge of debts, the other spouse will benefit from the “phantom discharge” — protection of all community property after the bankruptcy.

However, if one spouse owns separate property that would not be exempt (for example, a piece of real estate that was owned prior to the marriage, or inherited), that would weigh in favor of the other spouse filing as an an individual, so that the separate property does not become part of the bankruptcy estate.

Most consumer debts are community debts, such as mortgages and credit card debt.  Business debts incurred by one spouse (whether or not the business is incorporated) may also be community debts. As with assets, the couple can enter into a formal agreement to allocate debts.  If a debt can be characterized as an individual debt and not a shared debt, then an individual case may be preferable.  If both spouses have separate debts and want to discharge them all at once, a joint case may be the answer.

Another consideration is timing of the bankruptcy case.  The couple may need to file a bankruptcy case to avoid an adverse action by a creditor, but one of the spouses may wish to delay filing.  For example: one of the spouses owes income taxes that are not dischargeable yet.  If that person wants to discharge that tax liability, he or she should delay his or her filing.  In the meantime, the other spouse can file the case to deal with the other creditors and debts.

There may be other reasons why a married person with community property and community debts may choose to file a case as an individual.  The best way to decide is to review all of your current assets and debts with a qualified bankruptcy attorney.

image above courtesy of: totallytoppers.com