A bankruptcy can be filed by one or both married partners. It is entirely legal for a person to file for bankruptcy without his or her spouse, and when one person files for bankruptcy, the other is not automatically pulled into bankruptcy.
On the other hand, though, it can sometimes leave the non-filing spouse unprotected as he or she may owe shared debts without the protection of a bankruptcy filing. There are numerous ramifications to consider when deciding who should file.
In the event of joint property, the full property is put into the bankruptcy estate to pay creditors. This means that all of the property value is available to pay community creditors, potentially having very negative ramifications on the non-filing spouse as they will lose their half as well.
In the case of shared debt, the filing spouse will usually assume full responsibility for the unpaid debt. In some cases the creditor may look immediately to the non-filing spouse for full payment. In the event of a Chapter 13 filing, however, the debt will be protected through the repayment plan and should not affect the other spouse.
Marriage itself does not make both parties responsible for debt. Liability in relation to loans, credit cards, and mortgages must come from an agreement between the creditor and debtor. If the other spouse is not part of that agreement, he or she will not become liable for the debt should his or her spouse file for bankruptcy. This goes for debt incurred both before and after the start of the marriage; a person is only legally responsible for debt they personally incur and agree to.
Since each person has their own individual credit report, the non-filing spouse’s credit history will not directly indicate a bankruptcy. For shared debt, though, both parties should expect some indication on their credit report of a bankruptcy filing. This is a gray area in credit law, and a person can sometimes have it removed from their report if they fight it. Additionally, the bankruptcy will only affect the non-filing spouse in future credit applications if they submit a joint application. Individually, the person who did not file should not expect a penalty on their credit report.
It is legal for a person to file for bankruptcy without their spouse’s knowledge. In such a case, the non-filing spouse will likely be notified when shared debtors begin to contact them for payment. The best practice, even in the situation of a separation, is to notify your spouse in advance so that they may begin to prepare themselves financially.
In most cases, it is in the best interest of both spouses to file for bankruptcy together. The exception is when one person has incurred an extreme amount of debt that does not affect their spouse. If one person will be left with the full debt and no protection, however, it is often not in their best interest to have their spouse file for bankruptcy alone.