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joint bankruptcy - legal booksToday I want to talk about an issue that is important to every married couple considering bankruptcy—whether both spouses should file. The question comes up particularly often with families who arrange their finances so that most or all of their property is registered in the name of only one spouse. The answer in Arizona is that it is usually better for both spouses to file together. Although in most cases it may be sufficient for only one spouse to file, there are generally no benefits to be gained from doing so. Here’s why.

Arizona Community Property Law

Arizona is a “community property” state. This means that all property acquired during marriage is presumed to be jointly owned by both spouses (the exception to this rule is property acquired by gift or inheritance). Similarly, all debts acquired during marriage are presumed to be a joint liability of the spouses. This presumption of joint ownership or joint liability applies even if only one spouse’s name is on the title to the property, or only one spouse signed the loan documents. For example, let’s say you buy a car, obtain a loan for the purchase price, and put the title and the loan in your name only. If you are married, the presumption is still that both the car and the loan are jointly held by you and your spouse. To overcome this presumption, you would have to produce specific evidence showing that the property or debt belongs only to you, for example because you purchased the property with your separate assets, or because the debt did not benefit the marital community. There is an exception to this rule as well—real estate (land) normally does not become community property, and debts related to real estate do not become community debts, unless the relevant documents are signed by both spouses. The bottom line, however, is that most assets and debts acquired during marriage belong to the marital community, and both spouses own them jointly (in the case of property), or are jointly liable for them(in the case of debts).

joint bankruptcy - clauseSo, what does all of this have to do with filing for bankruptcy? Well, under the Bankruptcy Code, when only one spouse files for bankruptcy, all of the community property and community debt (property and debt held by the spouses jointly) is brought into the bankruptcy proceeding. This means that spouses cannot protect community property from bankruptcy by having only one spouse file. In addition, in most cases the non-filing spouse’s income will have to be included in the various bankruptcy tests related to income, and if the bankruptcy requires payments to creditors from future income (i.e. it’s a Chapter 13 or Chapter 11 bankruptcy), then the non-filing spouse’s income will usually be included in determining the payment amount. So, having only one spouse file will not usually protect the other spouse’s income from being included in the bankruptcy.

On the other hand, if one spouse files for bankruptcy, and receives a discharge at the conclusion of the case, the discharge applies to all community debts, even if the other spouse did not file. This means that none of the spouses’ community property will be liable for these community debts, even if the property is acquired after bankruptcy. However, if the spouse who did not file for bankruptcy is separately responsible for a debt, that responsibility will not be removed by the bankruptcy. So, to provide an example, let’s say that you obtain a credit card in your name only—your spouse does not sign any of the documents. You use the credit card to make various purchases. If you then file for bankruptcy and obtain a discharge, neither you nor your marital community is any longer liable for this debt, and your spouse was never separately liable because he/she didn’t sign any of the documents. That means the creditor cannot collect the debt from any property owned by you, your spouse, or the two of you jointly.

joint bankruptcy - imageNow, let’s say that you sign up for the same credit card, but instead of you filing for bankruptcy, your spouse files, and you don’t. In this case, if your spouse obtains a discharge, your and your spouse’s community property is no longer liable for the credit card debt, and the creditor cannot collect the debt from any property you own jointly with your spouse. However, your personal liability continues, and if you later acquire separate property (e.g. through a gift, inheritance, or because of a divorce), the creditor will be able to collect the debt from your separate property.

To sum up, while it may be possible for only one spouse to file for bankruptcy, it is not advantageous to do so if the non-filing spouse may have personal liability for any debts. Because it is often difficult to determine in advance whether there may be personal liability for a debt, and because in most cases there is no benefit to be gained from one spouse not filing, it is generally better for both spouses to file together.

Are there any situations when having only one spouse file for bankruptcy is beneficial? Yes. For example, if one spouse has significant separate property (e.g. property acquired before marriage, or by gift or inheritance), and this property would not be exempt in bankruptcy, that spouse may decide not to file in order to protect this property. Another example is if one of the spouses doesn’t qualify for bankruptcy because of a previous bankruptcy filing, or would not be able to receive a discharge. Yet another example involves cases where the spouses had signed a premarital agreement dividing their property and debt between themselves and reversing the presumption of joint ownership, and where a joint bankruptcy filing would make the spouses ineligible for the desired type of bankruptcy because either their combined income or their combined debts are too high. Of course, this list is not exhaustive, and there may be other circumstances when a separate filing by only one spouse may be useful.

Remember, every situation is different. The above is intended only as a general overview of the law at the time of this writing, and not as legal advice with respect to your particular situation.

To find out how to best time your bankruptcy, read When Should You File for Bankruptcy?.  To learn about common bankruptcy mistakes, read 7 Mistakes to Avoid When Filing for Bankruptcy in Arizona.

If you reside in Arizona and would like to find out whether a joint or separate bankruptcy filing is advisable, please contact a Mesa and Tucson bankruptcy attorney at Yusufov Law Firm PLLC for a consultation.

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