In some cases, a married husband and wife may desire one spouse to file for Chapter 7 bankruptcy and not the other spouse.
Normally, if one spouse files a Chapter 7 bankruptcy, the other spouse becomes a “silent beneficiary” who benefits from the other spouse's bankruptcy discharge. Some call the non-filing spouse’s discharge a “phantom discharge.” But just one spouse filing bankruptcy does contain certain risks.
This letter contains basic and very general rules. This letter does not discuss certain potential exceptions.
Let’s say two unmarried persons owe a joint debt. Then, one of the persons receives a bankruptcy discharge. The other party then remains liable to pay the debt.
But California is a community property state. So, let’s say both husband and wife owe a debt. Husband files bankruptcy and gets the debt discharged. Wife does not file bankruptcy. Then, the wife still owes the debt. She can still be sued by a creditor. But practically, the bankruptcy discharge causes the debt to not be collectible from the wife.
But if the husband dies, or if the couple divorces, or if the wife owns non-exempt (legally unprotected) separate property, then the creditors may be able to sue and actually collect against the wife after the bankruptcy discharge. Also, if the married couple moves to a non-community property state, such might possibly open the door for a creditor to collect the debt.
The above rules also apply if the wife had her own debts and did not file bankruptcy.
I have wrote above about “community property” and “separate property”. In California, almost all property is either community property or separate property. If you don’t know the difference, read the three indented paragraphs below:
If you earn money or acquire property during marriage, it is usually community property.
But, if you receive money by gift or will during marriage, it is separate property.
If you earn money or acquire property before marriage (or after permanent separation or divorce), it is separate property.
Back to the discussion:
Thus, a Chapter 7 bankruptcy discharge generally protects the spouse who did not file bankruptcy from having community property seized. But some creditors may not realize this!
One or more creditors could potentially seek to recover the debts owed from the non-filing spouse. The non-filing spouse can still be sued. Thus, you might have to hire and pay a lawyer to defend such an attempt to seize the assets. You might also hire a lawyer to seek to convince the creditor that it is a waste of time to collect on the debt.
Will the credit rating of the spouse who does not file bankruptcy be affected by the other spouse’s bankruptcy filing? It depends. The non-filing spouse’s credit rating and/or credit report possibly might, in some cases, potentially be negatively affected by the filing spouse’s bankruptcy filing.
While I usually recommend that both spouses file bankruptcy, in some cases, it may be potentially beneficial for just one spouse to file.
Preparing Bankruptcy Petition: Even if just one spouse files bankruptcy, the bankruptcy documents will look like both spouses are filing bankruptcy. Both spouse’s names, assets, debts, income, and expenses are contained in the bankruptcy papers. But only one spouse is named as debtor. Only one spouse technically gets the discharge.
For a free and confidential consultation, contact southern California bankruptcy lawyer Matthew B. Tozer.
See related article: Effect of only one spouse filing bankruptcy in a community property state
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