Marriage binds us to one another. In sickness and in health, for richer and poorer, to honor and to cherish.
Married couples in community property states such as California find that one spouse’s bankruptcy protects the other.
How can it be?
Why Community Property In Action
California is one of a handful of states that follow the rules of community property, which means that all the assets and all of the debts incurred after the marriage are owned and owed by both spouses equally.
What’s yours is yours, and what’s mine is yours – or so the saying goes.
If you fall into debt once you’re married, your creditor can usually attach your spouse’s wages and bank account. Marital property – including the house, the car, and the household goods – can all be taken to repay a judgment.
The Community Discharge In Bankruptcy Gets Your Spouse Off The Hook – Even If They Don’t File
One spouse can file for bankruptcy without the other. In most states, the won’t impact the non-filing spouse’s liability for repayment of the debt.
Not so in community property states such as California. In community property states, the non-filing spouse no longer is held responsible for those debts either.
If you decide to do this, I highly recommend that you consider it an anniversary gift to your spouse.
Understand The Community Claim
The U.S. Bankruptcy Code, understanding the unique world of community property – and the fact that California, with over 12% of the U.S. population, is a community property state – defines a community claim as any debt that is owed by a married person. And the term creditor is defined by the bankruptcy laws as an entity that has a community claim.
This is a major point because the law specifically provides someone who is not filing for bankruptcy with the protection of the law.
All the benefit, none of the burden. And when the end of the bankruptcy case comes around, the true power is revealed.
The Non-Filing Spouse And The Community Discharge
The end of a bankruptcy case usually results in a discharge of debt – that is, a legal release from personal liability for repayment of most kinds of debts.
That discharge means creditors can no longer try to collect on any debt – including community claims “in a case concerning the debtor’s spouse commenced on the date of the filing of the petition in the case concerning the debtor, whether or not discharge of the debt based on such community claim is waived.”
You file for bankruptcy and your spouse is protected from collection.
End The Marriage, End The Community Discharge
The protection of the community property discharge lasts only as long as the marriage does.
Remember, “until death do you part.” One spouse dies, the marriage is over.
So, too, with divorce.
Either of these events will expose the nonfiling spouse to collection action.
File Separately, Or Together?
Married people in community property states should look carefully at a laundry list of factors when thinking about filing for bankruptcy.
For some, filing separately makes a lot of sense. And for others, it’s a better idea to file together.
It’s no simple decision to make, but one that has a long-lasting impact on your finances.