Will Filing Chapter 7 Bankruptcy Affect A Non-Filing Spouse?

Chapter 7 bankruptcy can affect a spouse.  Here are some key points to consider:

1. Individual vs. Joint Filing:

• Individual Filing Example: Suppose John has accumulated $30,000 in credit card debt in his name only. He decides to file for Chapter 7 bankruptcy individually. His wife, Jane, is not responsible for this debt since it’s in John’s name only. However, they have a joint car loan. While John’s obligation to pay the car loan may be discharged in the bankruptcy, the lender can still require Jane to make the full payments, as she is a co-borrower.
• Joint Filing Example: If John and Jane both have significant debts in their names and decide to file for Chapter 7 bankruptcy jointly, the bankruptcy will impact both of their credit scores. If they have joint debts, filing jointly can help ensure that these debts are discharged, preventing creditors from pursuing either spouse for payment.

2. Community vs. Separate Property States:

• Community Property State Example: In a community property state like California, if John incurs debt during the marriage, it’s considered a debt of the community. If he files for bankruptcy without Jane, creditors might still be able to go after the community property to satisfy John’s debts. However, Jane’s separate property (e.g., an inheritance she received and kept in a separate account) would typically be protected.
• Common Law State Example: In a common law state like New York, if John incurs individual debt, only his separate property would be included in the bankruptcy estate. Jane’s separate assets would generally not be at risk unless she co-owns the debt or the property.

3. Impact on Joint Debts:

• Example: John and Jane have a joint credit card with a $15,000 balance. John files for Chapter 7 bankruptcy individually. After the bankruptcy, the credit card company can no longer pursue John for the debt, but it can demand full payment from Jane, potentially leading to financial strain for her.

4. Effect on Co-signers and Guarantors:

• Example: Jane co-signed a student loan for John. If John files for Chapter 7 and discharges the student loan, the lender can then turn to Jane for repayment. Despite John’s bankruptcy, Jane is fully responsible for the loan balance.

5. Credit Score and Credit Report:

• Example: John files for Chapter 7 bankruptcy, which includes a car loan that he and Jane took out together. While the bankruptcy won’t appear on Jane’s credit report, the joint car loan will show up as “included in bankruptcy” on her report, which could lower her credit score, even though she wasn’t the one who filed for bankruptcy.

6. Future Joint Credit:

• Example: Two years after John’s bankruptcy, he and Jane decide to buy a home together. When they apply for a mortgage, the lender considers both of their credit histories. Despite Jane’s good credit, the lender views the couple as a higher risk because of John’s recent bankruptcy, potentially leading to a higher interest rate or a denial of the loan.

When one spouse is considering filing for Chapter 7 bankruptcy, it’s crucial to understand the potential ramifications for the non-filing spouse, especially regarding joint debts and community property. These examples highlight the importance of careful planning and consultation with a bankruptcy attorney to navigate the complexities of bankruptcy and protect the financial interests of both spouses.