If I were to compile a list of the top ten most asked questions by potential bankruptcy clients, “Do I have to file bankruptcy with my husband/wife?” would be at the top of the list. It is a big concern of many couples because filing bankruptcy (either Chapter 13 or Chapter 7) will remain on a person’s credit for ten years. In the interest of saving one person’s credit from this hit, many married couples will ask if both of them need to file. The answer is a classic attorney answer of, “it depends.” (Please also note that my opinion and advice is based on Arizona law). This is important because the answer is largely dependent on the fact that Arizona is a community property state.
Community property law says that if you are married, any property you acquire while you are married is considered to be owned equally by each spouse. Therefore, if a couple gets a divorce, one half of the car belongs to the wife and one half belongs to the husband. This is regardless of whose name appears on the title. So, even though a couple’s car is titled in the husband’s name only, wife gets 1/2 of that vehicle too. The exceptions to the community property rule are sole and separate property (property that is owned prior to marriage) remains sole and separate, and property acquired during the marriage, but through specific gift or inheritance to one spouse, will be sole and separate. However, it may be argued that property becomes quasi-community through the actions of the couple. For example, if a man owns a house prior to getting married and never puts his new wife’s name on the deed, it would generally be sole and separate property. But, wife, in the midst of a nasty divorce, could come in and argue that she helped pay the mortgage on the house for the years of the marriage, paid HOA fees, paid for new floors, etc… Through all of that investment of her money, the house has now becomes community property.
Ok, so we know all about property, but bankruptcy involves mostly debt, right? So, why does a married couple need to worry so much about community property law when filing for bankruptcy? For a few reasons. First, community property equals community debt. Therefore, just like that car that’s titled in one spouse’s name and belongs to both of them through community property law, an American Express card obtained during a marriage, but only in one spouse’s name, will also belong to both spouses. There will be community liability on all debts incurred while a couple is married. Both spouses can be sued and garnished for a debt incurred in either name. In the context of a bankruptcy filing this means that one spouse could file on their own and on behalf of the marital community. This would discharge (or clear) all separate debts of that spouse plus any debts incurred by both spouses during their marriage. The downside (and the “it depends”) aspect is that the community discharge will only remain in place for as long as the marital community exists. If the couple decides to divorce later, the non-filing spouse will become re-liable for all the debts because the marital community no longer exists. While no one likes to think of these negative situations, it is something to seriously consider when only one spouse is going to file bankruptcy. Another factor to consider is that most collectors are not that smart (surprise!), and do not understand community property or bankruptcy laws. If only one spouse files, there is a strong chance that at least one creditor will try to pursue the other spouse for a debt. The situation can be rectified, but it can often be a temporary annoyance and a hassle to fix. Lastly, assets do come back into play in the bankruptcy scenario. When a bankruptcy is filed, all assets owned must be listed. Some assets become part of the bankruptcy estate and can be liquidated, while other assets can be exempted and protected from liquidation. A married couple can double all of their exemptions. If only one spouse files for bankruptcy, he/she must still list all of the separate property owned and all of the community property. The question becomes whether the filer can use double the exemptions to protect property that the non-filing spouse has an interest in? The Arizona case of In re James Anthony Perez, 302 B.R. 661 (U.S. Bank. AZ, 2003) seems to say that yes this can be done. The Court stated that because the filing spouse is acting on behalf of the marital community, that spouse can also assert all the available exemptions under Arizona law. However, I always get nervous with assets and anticipate trustees trying to liquidate as much as possible. Therefore, I would try to avoid this scenario as much as possible.
Thus, when I see married couples considering bankruptcy, my best advice is to file a joint petition unless there is some really good reason to file singly.