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Community Property and Bankruptcy - When one spouse but not the other spouse files a Chapter 7 bankruptcy:

1. California is a “community property” state.

2. In general, community property is defined as property, assets and earnings acquired while you are married.

3. In contrast, “separate property” is generally property, assets or earnings of one spouse acquired before marriage, or acquired by inheritance during marriage, or acquired after a permanent separation or divorce.

4. If both spouses file for bankruptcy, both spouses receive a discharge of all dischargeable debts. But if only one spouse files for bankruptcy, the effect of community property must be considered.

5. If only one spouse filed bankruptcy, only that spouse receives a discharge. But the one filing spouse's discharge will generally prevent the collection from community property. Thus, the non-filing spouse is said to receive a "hypothetical discharge" or “phantom discharge” (especially if such spouse has little or no separate property).

6. After discharge, the nonfiling spouse can still be sued by a creditor who can obtain a judgment, but the creditor can’t collect the debt from community property assets or earnings.

7. Note: The nonfiling spouse's hypothetical discharge is only good or beneficial as long as the nonfiling spouse stays married to the debtor, the spouses live together in a community property state and the filing spouse is alive. If the spouses divorce, or if the filing spouse dies, or if the couple moves to a non-community property state, then property and earnings acquired by the nonfiling spouse is no longer community property, and the nonfiling spouse can again be oftentimes effectively collected from.

8. The creditors of the nonfiling spouse generally can collect claims incurred by the nonfiling spouse from the separate property, if any, of the nonfiling spouse.  Remember, the “hypothetical discharge” of the nonfiling spouse only prevents collection against community property.

9. The principles above apply to all or most types of dischargeable types of debts, even dischargeable tax debts.

10. Also, note that the nonfiling spouse’s credit report and credit rating might in some cases be to some degree negatively affected by the filing spouse’s bankruptcy.  

For a free and confidential consultation, contact southern California bankruptcy lawyer Matthew B. Tozer.

See related article: May one spouse file bankruptcy and not the other spouse?

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