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Legal Effects When Only One Spouse Files for Bankruptcy
In general, the filing of bankruptcy by one spouse will not affect the other spouse’s financial situation. A debt is created by contract between a debtor and a creditor – each debtor must sign the contract to be liable for payment. Therefore, the bankruptcy of one spouse does not cause the other to become bankrupt.
Debts where spouses are joint and severally liable for payment will remain with the spouse who has not filed for bankruptcy. Under Chapter 7 bankruptcy, where one spouse’s debts are wiped clean, the creditor can go after the other spouse. However, a major advantage of Chapter 13 bankruptcy, where the debtor plans to re-pay her debts, is that the creditor will leave the co-debtor alone, as long as bankruptcy plan payments are timely deposited.
While the bankruptcy of one spouse does not generally affect the other, there are some notable exceptions. For example, the bankruptcy of one’s spouse may show up on the other’s credit report if joint debt is involved – a contentious area of the law. Also, if applying for a joint loan in the future, the bankruptcy of one spouse will affect the creditworthiness of the applying couple.
Another exception has to do with jointly held property. In a normal bankruptcy, much of the debtor’s (non-exempt) property is hauled away by creditors. If that property is jointly held, it can also be taken away. This is of vital importance in community property states like Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
By the same token, after the community property is boxed up and hauled away, property acquired by the non-filing spouse after the spouse’s bankruptcy is no longer accessible by the non-filing spouse’s creditors. In other words, the non-filing spouse in community property states gets a partial advantage from her spouse’s bankruptcy. From that point on, creditors can only go after the non-filing spouse’s separate property such as that acquired before marriage, by gift during the marriage, or by inheritance.
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