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When an individual is financially underwater, they might explore bankruptcy as an option. However, when that individual is married, the question about whether or not to declare bankruptcy becomes more complicated. While they can and often do, spouses are not required to file for bankruptcy jointly.
Generally, bankruptcy will allow a person, business, or married couple, to get out from under debt either by liquidating assets to discharge the debts, or structuring a repayment plan. However, because there are restrictions on qualifying for bankruptcy, it is not always a viable option for married couples. Sometimes, only one spouse may actually qualify. When only one spouse declares bankruptcy, the non-declaring spouse needs to be aware of the ramifications.
What Happens to Joint Debts?
In both community property and common law states, an individual's separate debts can be fully discharged. However, if a single spouse successfully has a joint debt discharged against them, unless the debt has been satisfied (paid) and released by the bankruptcy, the non-declaring spouse can still be held liable for those debts. So even though a creditor cannot come after the spouse that filed, the other spouse can still be pursued on the debt.
In community property states, the non-declaring spouse will be pleased to know that after bankruptcy, a creditor on a joint debt can no longer reach community property. However, the non-declaring spouse's separate property may still be reached to satisfy the debt.
Can Jointly Held Property Be Liquidated?
Generally, when married couples jointly hold property in community property states, each spouse has the right to sell, or otherwise dispose of their half of the property. However, during bankruptcy, community property is treated differently. In a community property state, all jointly held assets can be levied during the bankruptcy process.
In common law states, only the filing spouse's portion of joint property can be liquidated for the bankruptcy. However, if an asset cannot be split, then the whole asset can be sold. If this occurs, the non-filing spouse will be entitled to their portion of the money from the sale of the joint asset, and that portion cannot be used to satisfy the bankruptcy debts.
Bankruptcy is a very serious legal filing that can have lifelong consequences, and serious financial ramifications, for both individuals and married couples. If you are considering bankruptcy, seeking legal help is highly advisable.