- A spouse may be protected by a Chapter 13 bankruptcy filing.
My spouse has big credit card debts and wants to file for bankruptcy. I want a divorce. Which paperwork should we file first?
My husband and I are just starting our divorce. He wants to file credit card debt bankruptcy. I am not a co-signer or applicant on any card. If I file divorce papers before he files for bankruptcy, will this protect me from being connected to his filing therefore hurting my credit? We are in California.
The short answer to your question is, the order in which you file a divorce or bankruptcy does not matter in your situation. I would caution other readers who are in a similar situation but living in another state that the answer may be different.
You mentioned you reside in California. California is a "community property" state, which means that many assets and obligations of one partner created in a marriage become "community" assets or obligations. By extension, this can mean that one spouse can be held liable for many of the debts of the other spouse even if his or her name is not on the accounts which resulted in the debts. The other community property states are Arizona, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin and have similar, though not identical rules to the one I just cited.
If the spouses now live in a community property state, or lived in one at the time the consumer debt account (such as a credit card account) was opened, the non-signing spouse may have incurred liability without signing a credit contract as co-debtor. If the debt incurred during your marriage was used for the benefit of both members of the marriage, liability may accrue to the non-signing spouse in community property states.
Regarding a non-signing spouse's liability IF the parties are living in a community property state AND the debt was incurred during their marriage for the benefit of both spouses, AND a spouse is sued and a judgment is rendered for a specific amount owed, the judgment can be collected by wage garnishment against any defendant included in the judgment order singularly or simultaneously. The garnishment amount is normally 25% of net income (that is, after withholding) but this varies from state to state. The creditor does not have any duty to "even out" the judgment liability between the spouses. A creditor has the legal right to collect 100% from either spouse, whichever is more convenient for them.
As a practical matter, even in community property states, many creditors do not go to the trouble of suing both spouses, as doing so tends to complicate the legal process involved in obtaining a judgment. However, this does not mean that a particularly aggressive creditor will not pursue all of its available rights to collect a debt.
One important disclaimer: Community property laws are unique to each state -- no two states share the same laws. The discussion above regarding spousal liability is meant to provide general information about community property as a theory. Your state's laws may vary from the general theory. Therefore, it is important to consult with an attorney in your state who can review the details of your situation and give you accurate and precise advice about your rights and liabilities under your state's laws.
Bankruptcy and Spousal Debt
Now let us turn to bankruptcy. Let us assume one spouse filed for protection under chapter 7 or 13 of the federal bankruptcy code. That filing may not have any effect, positive or negative, on the non-filing spouse. In a non-community property state, the filing of one spouse does not give the other spouse protection of the "automatic stay" (blocking creditors from collection) or the bankruptcy discharge.
You may conclude from this that filing for divorce should occur after the filing for bankruptcy. Perhaps, if you were to delay the divorce filing for as long as it takes to complete the bankruptcy. However, during that time you are both liable for each other's debts during that time, and are not moving ahead with your lives. The facts in each divorce and bankruptcy are different, and you have given me a tiny window into your situation. For this reason alone I urge you to consult with a California attorney who has experience in divorce.
If both spouses are jointly liable to a creditor, the bankruptcy of one does not relieve the other of paying the debt. Upon a bankruptcy, the creditor may look to the other spouse for payment, unless the bankruptcy case is under Chapter 13. If the debt is a consumer debt to be paid 100 percent through the Chapter 13 plan, the co-debtor is protected by the co-debtor stay.
There may be good news for spouses who file for bankruptcy in a community property state. When one spouse files bankruptcy in a community property state, the marital community enjoys the protection of the filing spouse's bankruptcy discharge.
Consult with an attorney to discuss the possible ramifications for both spouses. Bankruptcy laws and courts are federal, but community property and family law vary from state to state. It is important to discuss your situation with an attorney familiar with your state's marital property laws.
Bankruptcy and Judgments
Some judgments cannot be discharged in bankruptcy, including child support, repayment orders dealing with cases of fraud, student loans and some taxes. However, a credit card judgment can be discharged in bankruptcy.
Review the Bills.com bankruptcy help page to learn more about this procedure, what it can do for you, and more on which debts can't be discharged in a bankruptcy.
I hope that the information I have provided helps you Find. Learn. Save.
Dealing with debt
Debt is used to buy a home, pay for bills, buy a car, or pay for a college education. According to the NY Federal Reserve total household debt as of Q3 2023 was $17.291 trillion. Auto loan debt was $1.595 trillion and credit card was $1.079 trillion.
According to data gathered by Urban.org from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 10% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.
The amount of debt and debt in collections vary by state. For example, in New Hampshire, 17% have any kind of debt in collections and the median debt in collections is $1672. Medical debt is common and 6% have that in collections. The median medical debt in collections is $500.
While many households can comfortably pay off their debt, it is clear that many people are struggling with debt. Make sure that you analyze your situation and find the best debt payoff solutions to match your situation.