Filing Bankruptcy Without Your Spouse – Pros and Cons
There are many instances where a debtor asks about filing bankruptcy without spouse. One spouse may be opposed to the concept of bankruptcy in general or may want to protect their individual creditworthiness. Likewise, a pending inheritance may make one spouse reluctant to file. For these reasons, one spouse may choose not to file a joint petition with his or her spouse. But there are a number of pros and cons of not filing a joint petition which should be discussed in advance.
Non-Filing Spouse Gets the Benefit of the Community Discharge
First, the filings spouse is able to discharge both the sole and separate debts of the filing spouse as well as any community debts. The non-filing spouse therefore benefits by receiving a community discharge and creditors cannot pursue post-petition assets such as income which is presumed to be community property. If the non-filing spouse personally signed for the debt, the creditor can pursue the non-filing spouse’s sole and separate assets. But as a practical matter, this rarely occurs as creditors are worried about violating the automatic stay or discharge injunction. So the non-filing spouse can still receive a significant benefit through his or her spouse’s discharge.
All Community Assets Must Be Listed
But there are a number of issues that should not be overlooked for the non-filing spouse when filing bankruptcy without spouse. First, in exchange for the community discharge, the filing spouse gives up or pays the fair value of all non-exempt community assets. There is a strong presumption that all property acquired during marriage is community property. So the spouse’s separate filing could expose the non-filing spouse’s assets to claims by the trustee that the property is a community asset and must be turned over. The non-filing spouse may be surprised when the trustee makes a claim to their jewelry, vehicle or small savings account. For these reasons, both spouses assets should be disclosed to bankruptcy counsel prior to filing. This is a bigger concern for Chapter 7 bankruptcies where assets are generally liquidated for the benefit of creditors.
The Community Discharge for the Non-Filing Spouse is Not Indefinite
The other issue not to be overlooked is that the non-filing spouse’s benefit from the community discharge may not be indefinite. If the parties divorce or the filing spouse dies, there is no longer a community to which the community discharge would apply and the creditor may be able to pursue the non-filing spouse’s assets. This rarely occurs, but it is not something to be overlooked.
The Non-Filing Spouse Preserves Credit
Lastly, the preservation of a non-filing spouse’s creditworthiness is not always absolute when their spouse files. While a bankruptcy will not appear on the non-filing spouse’s creditor report, certain joint credit cards under both social security numbers will be closed by the creditor upon filing. The closing of a revolving credit account can have a small negative effect on one’s credit and the closing of multiple accounts may have a larger impact. Nonetheless, one’s credit should not be an overriding concern with bankruptcy. It is much cheaper and quicker to fix and repair one’s credit than it is to deal with the debt outside of bankruptcy which also has equivalent credit implications.
For these reasons, it is often advisable for both spouses to meet with bankruptcy counsel to understand the risks and benefits when only one spouse files for bankruptcy. There is no right or wrong choice to filing bankruptcy without spouse and each individual must make their own decision to pursue bankruptcy or not, but both spouses should understand and discuss the issues and know in advance the concerns that may arise.