Bankruptcy- how does it affect my spouse?

If you were wondering how filing for bankruptcy affects your spouse, read this article.

Bankruptcy is both a legal state and a legal process. In its simplest form, bankruptcy means that a person or limited company is not able to meet its obligations as they come due. The bankruptcy process has two objectives - to ensure that the bankruptcy creditors are repaid their debt as much to the greatest extent possible in the circumstances, and to assist the bankrupt in reestablishing themselves financially. In the United States, all bankruptcy proceedings are governed by the federal law prescribed by Title 11 of the Bankruptcy Code.

It permits a variety of different legal applications that have received considerable media attention in recent years, including Chapter 11 (where the bankrupt is allowed to continue in business under protection from creditors), and Chapter 7 (where the bankrupt’s assets are liquidated to pay creditors) Personal Bankruptcy As a general rule, all debts incurred by a person are their sole responsibility. If one spouse files for bankruptcy to resolve a negative financial situation, only they and not their companion spouse are responsible for the debt; only they are subject to bankruptcy proceedings.

A person’s spouse, defined either by legal marriage or by virtue of the various state laws that define a common law spouse, is not responsible for these debts. As a general rule, a bankruptcy filing will have no effect of the non-filing spouse for these reasons. There is a common misconception that marriage renders one spouse automatically responsible for their partner’s debts. It is a common practice amongst some collection agencies that if a debtor does not honour their account, the agency threatens to “go after the spouse” for the outstanding money.

The only circumstance where a spouse may be held responsible for the debt of their partner is where the spouse has cosigned for a particular loan, or where otherwise a contract was jointly entered into by both spouses. The bankruptcy of one spouse will not extinguish the joint obligation of the non-bankrupt spouse to pay the debt. What if both spouses file for bankruptcy? In the United States it is relatively common for two spouses to make a joint bankruptcy filing under the Bankruptcy Code.

In many circumstances, the debts that have prompted the insolvency of one spouse are jointly held with the other spouse and each party has insufficient means to satisfy the debts. It is more efficient to file a joint bankruptcy application that for each spouse to proceed separately. This decision requires a very careful consideration of the assets and debts of each spouse. Legal advice as to the best approach and the consequences of bankruptcy for each spouse is essential, given the impact of bankruptcy on an individual credit rating

This article describes the impact of a bankruptcy proceeding commenced by one spouse on their companion spouse; it includes a consideration of joint bankruptcy filings.