Marriage is really important in bankruptcy and one of the most complicated and confusing areas of bankruptcy practice.

Can I file bankruptcy without my spouse?

In short, yes. But your spouse’s income, expenses and property need to be accounted for in the bankruptcy filing. In California we have two different ways to exempt and protect your property (that are supplemented by other state and federal protections). The majority of our exemptions are found under CCP 703 and CCP 704. Those are California codes that permit people to protect and keep different types of property, such as your home, bank accounts, retirement or cars. If you file bankruptcy and use CCP 703 exemptions, your non-filing spouse must sign a waiver permitting you to use these exemptions. This can be difficult in circumstances where you are separated, estranged or your spouse is otherwise not cooperative. No spousal waiver is required to use CCP 704.

All community property is included in the bankruptcy.

California follows community property rules. With a few exceptions, that means that all property acquired during the marriage belongs to the community. Even if only one spouse files, all community property goes into the bankruptcy estate. The instant you file bankruptcy, a “bankruptcy estate” is created; all property you have an interest in goes into this estate. In Chapter 7, the trustee controls the bankruptcy estate. That means upon filing, all community property belongs to the trustee, so you need to understand the values and scope of the community property. But by careful planning and wisely using the exemptions mentioned above, the trustee won’t be able to take any of your property.

One of the worst things to witness at the hearings with trustees is a spouse that files bankruptcy on his or her own without understanding community property (among many other things, but that’s another topic). They leave out their spouse’s bank accounts or believe that having property titled in the non-filing spouse’s name only means it can be excluded from the bankruptcy. This can lead to devastating results. Part of your attorney’s job is planning, timing and protecting your property to avoid these problems.

Can creditors reach the non-filing spouse?

Maybe, but in a limited way. There are two liabilities to consider: your personal liability, and liability against your property. The bankruptcy protects all community property acquired after you file bankruptcy (think of future earnings, buying a home etc. as a married couple after bankruptcy is filed). The non-filing spouse, however, remains personally liable.

Does the non-filing spouse have separate property?

Separate property is property acquired before the marriage or certain types of property during the marriage (such as an inheritance). If the non-filing spouse has separate property (for example, a car paid for before your marriage), or acquires separate property after marriage (such as an inheritance or because you separate or divorce), the creditors could reach this property. If the non-filing spouse has no separate property and does not acquire any after the bankruptcy, the creditor could still potentially sue and get a judgment, i.e., personal liability. But if there is no separate property to collect against, there is a judgment only; the creditor can’t take anything from you because future community property is protected as long as you remain married.

Divorce is a real possibility. Should I file before or after the divorce?

If you and your spouse are going through the painful process of separation, but it’s still amicable, you can file together if that is the best solution. This can make the divorce a little easier in some circumstances by eliminating the debts shared by the spouses. Given these economic times, it seems that spouses are often dividing debts instead of assets.

Timing-wise, many attorneys follow a rule that they will not file a bankruptcy for someone in a pending divorce proceeding until there is a marital settlement agreement that defines who gets what. This is because a marital settlement agreement can alter the nature of your debts and/or assets. Regarding debts, perhaps you and your spouse opened a joint credit card that now has a high balance. This is dischargeable in bankruptcy. Suppose, however, that one spouse files and the other spouse is on the hook for the debt. The court can require the spouse that filed bankruptcy to pay off this debt in the form of spousal support. Spousal support/alimony is a domestic support obligation (DSO) and not dischargeable. Ouch.

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Confused? Marriage and bankruptcy gets tricky, so please consult with an attorney and save yourself a lot of time, money and grief.

Image courtesy of duncan.