How is the property of a non-filing spouse handled in bankruptcy?
Property of a non-filing spouse may be an issue during bankruptcy
It's a mistake to think that divisions of property are only considered by the U.S. Bankruptcy Court when the filers of bankruptcy petitions are divorced. Property questions also come into play when married individuals file bankruptcy, and those questions differ based on whether the filing takes place in a state with or without community property laws.
By and large, most people in the U.S. are not affected by community property rules because they only exist in nine states and one U.S. territory - Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin and Puerto Rico. In those locales, all property earned or received during a marriage is split equally between the two spouses, except for gifts and inheritances.
"In bankruptcy, all the community property you and your spouse own jointly is part of the bankruptcy estate, regardless of whether you join in the filing," states BankruptcyLawFreeAdvice.com. "Your separate property - property you owned before the marriage - is not affected by your spouse's bankruptcy. Property held by your spouse will be used to settle debt first, and then non-exempt community property will be used."
However, in most of the country, property owned by a couple is based on the common law of "equitable distribution," which divides marital property according to many factors that consider the financial situation of each spouse. Equitable distribution is more flexible, but also more complicated and not as clear-cut as the fifty-fifty split that community property laws provide.
"In states that follow common law property rules, debts incurred by one spouse are usually that spouse's debts alone, unless the debt was for a family necessity, such as food or shelter for the family or tuition for the kids," states the legal website Nolo.com. "These are general rules. Some states have subtle variations in how they treat joint and separate debts."
At the same time, the court requires that the non-filing spouse's salary and asset information be supplied in order to determine whether the bankruptcy should be filed under Chapter 7, in which all non-exempt property is liquidated, or Chapter 13, which requires payments be made to creditors over three to five years.
In addition, when joint property is held by a married couple, the non-filing spouse may be subject to debt collection by creditors. The automatic stay of the bankruptcy case, which prevents creditors from pursuing collection, may not apply to the non-filing spouse.