How Bankruptcy by One Spouse Affects the Other Spouse.

Written by James Hirby | Fact checked by The Law Dictionary staff |  

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When one spouse files for bankruptcy, there is some impact on the other spouse, especially while the bankruptcy proceeds, especially on liabilities and assets that are held jointly, until the final decisions are made and the bankruptcy is discharged.  To say it simply, it is a mess that will likely put a rather bad strain on the marriage, if one does not already exist.  One impact, or non-impact, is that the non-filing spouse does NOT get any relief by the bankruptcy’s “automatic stay” for his or her creditors; only the filing spouse gets that relief.  One impact is that the non-filing spouse does get listed as a participant for those liabilities and assets that are held jointly.  This is for information that will lead to determining how much of the asset is owned by one spouse versus the other.   Bankruptcy law requires that this be determined.  It also requires that the non-filing spouse show proof of partial / joint ownership of each asset and liability.  This can be a part of the initial filings, but must be clear and complete at the trustee, or “341” hearing.

Impact on the non-filing spouse on joint debts can be that the non-filing spouse is left owing the full debt to a creditor.  The filing spouse can be relieved of personal responsibility for the remaining debt, but that debt does not go away, especially if there is joint ownership.  At that point, the creditor can (and likely will) start its hunt for its money with the other spouse.  This does not only apply to credit card debt, this also applies to loans, such as mortgages.  Each signer is individually responsible for the outstanding balance and periodic payments, property taxes, and any other liens against the property.

Impact on the non-filing spouse for joint assets is that the asset must be listed on the trustee’s list.  How that asset is handled depends on what it is, if it has any exemption value, and how much is owned by the filing spouse versus non-filing spouse.  Be aware that the trustee can and will sell the asset if enough value exists after paying off the non-filing spouse and the exemption(s).  Lawyers and experts alike relate that this will happen.  Expect it to happen.  The most important thing that a non-filing spouse can do and can have is a paper trail that proves how much the non-filing spouse owns in an account or of a jointly-held asset.  This provides the bankruptcy lawyer and the trustee with essential information on how to handle these assets.  The non-filing spouse is legally entitled to exemption and part of the worth of an asset, even if jointly owned, amount of money in a jointly-held account that the non-filing spouse submits deposits.  That spouse’s proof will allow protection and extraction of that wealth to that spouse.

Several experts and many people that experienced it tell that bankruptcy can be noted on the non-filing spouse’s credit report, to make future creditors aware that the other spouse is undergoing or has undergone a bankruptcy.  This should not impact the non-filing spouse’s individual credit score.

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