A common question I get from married couples who are facing debt problems is whether both need to file for bankruptcy or if it is permissible for one spouse to file the bankruptcy.
Many couples would like to try and save one spouse’s credit score or it may be that the debt was something that was incurred by one spouse prior to the marriage.
The short answer is yes, it is possible for one spouse to file for bankruptcy alone. However, in community property states like Arizona it is a bit more complicated. Before you make the decision whether both of you file or just one of you, it is important to fully understand the pros and cons of only one spouse filing.
Benefits of Bankruptcy for the Non-Filing Spouse
Before we get into the bankruptcy specifics it is important to understand what it means to live in a community property state like Arizona. Basically, being married in Arizona means that what ever debts you incur and whatever assets you purchase while you are married are joint. There are a few exceptions to this rule, but generally both of you jointly own all of your assets and are jointly responsible for the debts.
Community property laws can make bankruptcy a bit more complicated.
When a bankruptcy is filed with the court an order is automatically entered that stops all collections against the person who has filed for bankruptcy. This order is appropriately named the “Automatic Stay“.
If both you and your spouse file for bankruptcy then the order will stop all collections against both of you.
If only one of you file for bankruptcy then the Automatic Stay stops all collections against the person who filed for bankruptcy AND it stops all collections against the marital community. This means that if you file for bankruptcy the creditors must stop collection activity against you and anything that could impact your marital community (i.e. your spouse).
The reason a person files for bankruptcy is to obtain the bankruptcy discharge. The discharge order is the document that lets all of your creditors know that they are no longer permitted to collect on the debts and the debts have been eliminated.
When only one spouse files for bankruptcy and obtains a discharge that spouse is protected from all future collection activities – including collection calls, wage garnishment, lawsuits, etc. Also, the marital community is protected from the collection activities of creditors.
The spouse that did not file for bankruptcy is technically still liable for the debts that existed before the bankruptcy case was filed. However, the bankruptcy discharge obtained by one spouse also protects all marital assets obtained before and after the bankruptcy filing of the non-filing spouse.
This means that while the non-filing spouse is technically still liable for the debt, the creditors cannot satisfy the debt through any marital property. This includes wages of either spouse.
So what can a creditor do to try and collect on a debt against the non-filing spouse? They can only collect from the non-filing spouse’s “separate property”. Under community property laws property that was owned prior to marriage is considered “separate property”. Most married couples in Arizona do not have much separate property, if any, and the end result is that the creditor is often out of luck when it comes to collecting anything from the non-filing spouse.
So to put this simply, the non-filing spouse gets protection from the bankruptcy discharge entered in the filing spouse’s bankruptcy case – and again this includes protection against wage garnishment.
What Happens if We Get Divorced?
Under Arizona community property laws divorce or death of a spouse terminates the marital community. When it comes to dealing with debt this can have important consequences for the non-filing spouse. Remember, the non-filing spouse is technically still liable for the debts even though they are protected by the bankruptcy discharge.
However, if the marital community ends, either through divorce or death, the creditors are then free to pursue collections against the non-filing spouse – including through wage garnishment.
There may be other defenses against the collection of the debt (like the expiration of the statute of limitations), but if the debt is still valid then the creditor will be permitted to resume collections against the non-filing spouse.
Do You Need Help With Your Debt Problems?
If you are stressing out about your debt problems know there is hope. Here at the Arizona Consumer Law Group we offer a free consultation to meet with you and discuss your different options and make sure you are fully informed as you put together your plan to become debt free.
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