Last updated May 30, 2017.
Do both husband and wife have to file for bankruptcy in California? Can one spouse file for bankruptcy? Does a wife get relief from a husband’s bankruptcy? These are a set of simple questions with complex answers. Generally, a spouse is not responsible for the other spouse’s debts. This comes from basic legal principles as well as federal laws that mandate that separate credit files be kept for each spouse, with one spouse’s debts not appearing in the other’s credit file.
Of course, there are many exceptions. Below, we’ll discuss what happens when:
- Both spouses sign the mortgage note for a house, or cosign on a personal loan or car loan
- A husband and wife share a credit card or multiple credit cards
- The California means test affects your bankruptcy filing
- You file for divorce before, or after, bankruptcy
Co-signors: Who is liable for debt in bankruptcy?
The first, and perhaps biggest, exception to be concerned with is where both spouses are contractually liable for a debt. This means if one spouse signed on the dotted line along with the other spouse, they are both fully liable. This might include true joint debts, where both spouses sign the mortgage note for a house, and other debts, such as personal loans or car loans, where both spouses are borrowers and both sign the papers.
However, people often become confused where one of the spouses is designated as a “co-signor.” This is a term that should be stricken from the language, because there really is no such thing as a co-signor. Each party is as liable as the other. For example, when someone co-signs a car note to help their spouse get a car loan, they may be under the impression that only if the lender cannot find the original borrower will the lender then pursue the co-signor. This is not true at all.
When someone signs a note as a “co-signor” or “co-borrower” or with any other term, they are as fully responsible as the other person for the entire balance due on the loan. If the loan goes into default, the lender can pursue the co-signor without even trying to make the other person pay. These principles are as true when the two people involved are spouses. If one spouse co-signs a loan with the other, the co-signor is indeed fully responsible for the debt. Thus if a spouse co-signs for a loan for their spouse’s car, or co-signs for a loan that really is for the spouse, and the spouse files for bankruptcy, the “co-signor” is fully liable for the balance. This includes student loan debt, which is generally not dischargeable in a bankruptcy.
See also: My Cosigner Filed Bankruptcy. Now What?
Is a spouse responsible for credit card debt?
This idea of a co-signor can get tricky when one spouse gets a second credit card for the other spouse. In those cases where the non-filing spouse did not sign for the original card, or did not sign anything making themselves liable for the whole account when the second card was issued, they should not be liable for the account.
It is important for the non-filing spouse to get a copy of their credit report a few months after the bankruptcy case is over to see if the particular card is listed on their credit report. If it is, they should write to both the bank and the credit agency demanding that any reference to that card be removed as they were neither liable on the card nor did they file for bankruptcy. Learn more about how you can wipe credit card debt from your bankruptcy in our informative post here.
How the Chapter 7 Means Test Changes When You’re Married
Another situation where a spouse’s debts can provide problems is what is called the “means test” in the bankruptcy law. The means test is used to determine whether a debtor has the “means” to pay any part of their debts — if so, the debtor won’t qualify for Chapter 7 bankruptcy and will have to file under Chapter 13.
Chapter 13 bankruptcy involves repayment of some of the debt through a court-approved plan. This can be a small percent of the debts up to 100% of the debts. The means test judges one’s ability to pay based on their income, and where they are married and living with their spouse, it is based on total family income. There is a certain amount an individual living alone is allowed to have before they must pay something back. This is called the median family income. The median family income rises where there are two members of the family, and increases for each additional member of the family.
Where a husband and wife are living together, both spouses’ incomes are thus added together to see if the filing spouse meets the test. Thus in a situation where one person’s income would not be enough to require any repayment, both incomes together might exceed the threshold for a family of two, and a repayment plan may be required.
See also: Chapter 7 Bankruptcy Myths
Divorce and Bankruptcy
Another area of concern is where there has been a divorce. Where there is a provision in the divorce judgment or the divorce settlement agreement obligating one spouse to pay any debt of the other spouse, filing for bankruptcy will not relieve the spouse ordered to pay from that obligation. Thus, if the spouses are divorced and the filing spouse was ordered to pay a certain credit card, the filer will still be responsible for the debt even though they filed for bankruptcy.
My spouse is filing for bankruptcy. What should we do about our debts?
The question of what to do when there actually is a joint liability may come down to a consideration of how much debt will be extinguished compared to how much might have to be paid back. If your spouse has large debts and there is one card on which there is joint liability, it may well be worth it for your spouse to file anyway, and pay off the one debt. Usually, one would continue making regular monthly payments until the debt is paid, and there would be no impact on the non-filing spouse’s credit score.
To avoid these and other complications, consider keeping your debt completely separate from that of your spouse, with the possible exception of a mortgage on your jointly-owned home.
If you or your spouse is planning on filing for bankruptcy, contact one of our experienced bankruptcy attorneys for a free consultation to learn how best to protect your interests and those of your spouse. We’ll make sure you get the most out of the bankruptcy process.