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How Bankruptcy Affects Your Spouse

EH Law Group March 30, 2023

Statistics show that people filing for bankruptcy protection in California file for chapter 7 bankruptcy 80 percent of the time and for Chapter 13 bankruptcy 20 percent of the time. There are major differences in both types of filings, and determining which bankruptcy to file depends on specific circumstances, such as having a spouse.  

A common question is whether one spouse who has accumulated most of the outstanding debt files for bankruptcy on their own or file jointly. California is a community property state, meaning that everything acquired during a marriage – including debt – belongs to both spouses. But if the debt warranting the bankruptcy filing is in one spouse’s name, should that be an individual or joint filing?   

If your debts are overwhelming you in or around San Mateo, California, and you need to seek bankruptcy relief, contact the attorneys at the EH Law Group. We will assess your situation and advise whether an individual or joint filing is the most beneficial option. With our combined three decades of experience in helping individuals and couples navigate the bankruptcy system for a fresh start in life, we will help you achieve that fresh start.  

With offices in San Mateo and San Francisco, we help clients throughout the Greater San Francisco Bay Area, including South San Francisco, Oakland, Daly City, and Santa Clara County, California. 

Community Property in California 

California is one of 10 states nationwide that observes the standard of community property, meaning that everything acquired during the time of marriage is jointly held or owed since debts are considered community property as well. There are exceptions for property or assets that are acquired through inheritance or as a gift.  

In addition, anything acquired before marriage is considered separate property, but even in this case, that property can become commingled. For instance, if you own a rental unit before marriage, but after marriage, you use joint assets to maintain the property – you use your spouse’s income to help in the upkeep – the property can become jointly held, at least to some percentage.  

The community property standard is vital when it comes to bankruptcy since creditors can hold both parties liable if one spouse in debt files for bankruptcy. It’s possible that the creditors could go after the other spouse even if one spouse is discharged from debts through bankruptcy. 

Filing for Bankruptcy as an Individual When Married: Pros and Cons 

With California’s community property standard in mind, what if one spouse runs up huge debts in their name only and files for bankruptcy protection as an individual?   

If you file for a Chapter 13 reorganization plan, then community property will not be affected, as long as the assets are included in your repayment plan. If you file a Chapter 7 liquidation plan, the bankruptcy trustee will attempt to partition or divide the community property so it doesn't affect the other spouse.   

California’s exemptions for personal property and other assets will also figure into the equation so that the non-filing spouse can be protected. For instance, depending on where you live, your home’s equity can be exempted up to $600,000.  

When all is said and done, assuming that joint assets aren’t subject to any seizure or sale, the bankruptcy will affect only the filing spouse’s credit score and creditworthiness, which will stay on that person’s report for seven to ten years, depending on whether it was a Chapter 13 or Chapter 7 filing, respectively. The other spouse will have a clear and unaffected credit report. With one spouse having good credit, it can be easier to move forward. 

Filing for Bankruptcy as a Couple: Pros and Cons 

One of the prime benefits of filing jointly, assuming both have debts they need to discharge, is that both spouses will gain a fresh start, but on the other hand, if one spouse has a clean credit history, the bankruptcy will cloud that person’s creditworthiness and credit score. Another benefit is cost. The filing fee for two is the same as for one. In some cases, the exemptions can be doubled to cover assets belonging to each spouse. 

Factors to Consider 

Potentially the deciding factor is which spouse is more exposed to debt issues and how a bankruptcy filing may affect the other spouse who has a positive credit history. Exemptions available are certainly a factor, so it’s a good idea to confer with an experienced bankruptcy attorney to weigh all your options. You certainly don’t want your spouse to have their credit damaged because of your mistakes or misfortune. 

Compassionate Legal Assistance 

If you're in or around San Mateo or San Francisco, California, and feeling overwhelmed by debt, contact the bankruptcy attorneys at the EH Law Group immediately. We will evaluate your situation and present your legal options to you. If you file for bankruptcy, we will guide and assist you every step of the way until you achieve the fresh start in life you deserve.