Equitable distribution impacts non-filing spouse during bankruptcy
Community property laws in some states define how non-filing spouses are affected when their partners file bankruptcy. However, most of the country relies on the common law of "equitable distribution," which is more flexible but also more complicated than the clear 50-50 split provided by community property rules.
In equitable distribution, marital property is divided according to many factors that consider the financial situation of each spouse. It is the prevailing way of determining someone's liability in bankruptcy cases, as it is the law in all but nine states and one U.S. territory where community property is observed.
Factors that are considered in equitable distribution, and may come into play during a bankruptcy proceeding, include the earning power of each spouse, the role of each partner in acquiring property and the separate assets of each person, which may vary in value.
According to Nolo, debts incurred by one spouse are usually that partner's responsibility under common property law. An exception occurs when a bill involves a family necessity, such as food, shelter or school tuition. While states have variations in their property laws, they follow the general principle of equitable distribution.
The U.S. Bankruptcy Court requires that a non-filing spouse's salary and asset information be supplied to determine whether the bankruptcy should be filed under Chapter 7, in which all non-exempt property is liquidated, or Chapter 13, which requires a creditor payment plan for three to five years. Although non-filing spouses aren't involved in Chapter 13 repayment plans, their incomes come into play when the court determines whether a plan will take three or five years. Debtors who earn more money typically are required to pay their creditors for a longer period.
When joint property is held by a married couple, the non-filing spouse may be subject to debt collection by creditors under equitable distribution. The automatic stay enforced by the court in bankruptcy cases - which prevents creditors from pursuing collection - often doesn't apply to a non-filing spouse.
By contrast, even if only one spouse files for Chapter 7 bankruptcy in a community property state, all of the eligible community debts of both spouses will be discharged. In addition, the non-filing partner will reap some protection after a discharge of debts occurs. Bankruptcy protects any property that the debtor owns, including jointly held assets acquired by the couple after bankruptcy. However, the non-filing spouse receives this protection only for the duration of the marriage.
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