Question: I live in California and have a lot of debt from when my business failed, My wife wasn’t really involved in the business and we want to protect her credit rating. Does she have to file for bankruptcy with me if I file?
Answer: The general rule is that the bankruptcy discharge only protects the person filing for bankruptcy. A non-filing spouse might still be liable for some or all of the debt. However, the rule is different for people who live in California and other community property states because a bankruptcy discharge of one spouse protects all community property.
Example: In California, a judgment creditor can garnish the community property salary of a spouse that isn’t even liable for the debt. A bankruptcy discharge would protect the wages of both spouses, even if the non-filing spouse is also liable on the judgment.
When only one spouse files for bankruptcy, all community property is at risk and can be used to satisfy community debts. As a result, however, the marital community benefits from the discharge and creditors cannot use community property to satisfy a debt of the non-filing spouse.
Because of this community property protection, some couples will choose for only one spouse to file to protect the other spouse’s credit rating. However, there may many reasons for both spouses to file:
- The creditor can still file a lawsuit against the non-filing spouse. The non-filing spouse remains liable for any joint debts. While the community property is safe, the separate property is at risk. For example, the non-filing spouse might receive and inheritance or brought property into the marriage that remains separate property.
- The marital community doesn’t last forever. The community property protections of banruptcy stop when there is no longer a marital community. The marriage could end in divorce or the death of a spouse and there would be no more community property.
- The non-filing spouse may be liable debts not in their name. Under California Family Section § 914, a married person is personally liable for debts incurred for the “necessaries of life” while the spouses are living together. In theory, a non-filing spouse could be liable for a mortgage or a credit card debt used to buy food even though spouse didn’t sign the loan or credit card agreement.
Deciding whether or not both spouses should file for bankruptcy is very fact specific and depends on the laws of the state were you live. Consult with a qualified bankruptcy attorney to receive the best advice on your particular situation.
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