While it is common for a husband and wife to file a joint bankruptcy, in some cases it is beneficial for only one spouse to file. When one spouse files for bankruptcy protection, the other (non-filing) spouse is not automatically joined into the case. The husband and wife are treated separately and individually, although there are some consequences to the non-filing spouse, both positive and negative.
The primary benefit of a single spouse bankruptcy filing is to protect some or all of the property in an asset from turnover to the trustee. In general, bankruptcy law looks to the applicable state law to decide property rights. See Butner v. United States, 440 U.S. 48, 55 (1979). Under state law, each individual person has their own assets, whether owned individually, or in some form of joint or common ownership with another person. The bankruptcy estate has no greater interest in an asset than the debtor has. See 11 U.S.C. § 541(d); In re McCafferty, 96 F.3d 192 (6th Cir. 1996). Consequently, the married debtor filing alone must determine what property is his, hers, and ours.
A single spouse bankruptcy filing should be considered when one spouse has high debt, but the non-filing spouse holds property as sole, non-joint property. Property in which the debtor has no ownership interest is generally not property of the debtor’s bankruptcy estate and is beyond the reach of the bankruptcy court. For example, husband owns a $1,000,000 home in his name only. Wife is sued and owes $1,000,000 in her name only. Whatever the creditor receives will come from the wife’s assets and not the husband, or his $1,000,000 home.
Additionally, where the state law allows, the debtor may be able to halve equity in an asset or protect it altogether. For instance, suppose that husband owes $50,000 in credit card debt in his name only, he and his wife jointly own a home with $50,000 in equity, and they live in a state where the husband can claim a $25,000 homestead exemption. If the husband files an individual bankruptcy and the wife does not, the most the husband’s creditors can reach is the non-exempt equity in the home. In this case he can protect his entire one-half interest with his $25,000 homestead exemption and his creditors get nothing.
While the general rule in bankruptcy is that the bankruptcy only affects the debtor’s liability and the debtor’s property, the rules get a bit more complex when dealing with a community property state. There are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. When one spouse files bankruptcy in a community property state, all of the community property acquired during the marriage comes into the bankruptcy estate. All of the claims enforceable against the community property are allowable in a debtor’s spouse’s separately filed bankruptcy case. However, after a debtor’s discharge, the non-filing spouse remains liable for a debts that the debtor incurred, but because of the bankruptcy discharge, the non-filer’s debts can be collected only from separate property. That is because the creditors had an opportunity during the bankruptcy case to collect from the community property.
Filing bankruptcy is not simply filling out forms. Careful planning is required ensure bankruptcy success and to avoid creating a financial disaster.