It is never easy to decide whether to file for bankruptcy, especially when you have a financially stable spouse. You may wonder whether your financial struggles could lead to bankruptcy or whether your spouse’s assets and income could help resolve the debt.

Even though bankruptcy lets you start over, the shared finances can cause problems among household members, from impacting shared finances to complicating credit decisions. Furthermore, many married couples wonder whether one partner’s bankruptcy will affect the other partner’s credit score or ability to qualify for loans.

Before making this big decision, married couples must understand how bankruptcy laws apply to them, whether they file together or separately. If you carefully consider your choices, you can preserve your spouse’s financial health while seeking relief from your overwhelming debts.

So, if your spouse is financially secure, should you still file for bankruptcy, or is there more to explore? The information below will help you make your decision.

The Impact of Community Property in California Bankruptcy

In California, both parties share anything bought while married equally, even if it is only in one spouse’s name under the principle of community property. In light of bankruptcy, this legal framework becomes very important. When one couple files, the couple’s property is considered part of the bankruptcy estate. This means creditors can go after half of the community assets even if just one spouse is filing. This shows that a married couple is financially joined according to the law.

California's community property law also addresses liability issues, not just ownership issues. Any debts one spouse accrues alone can still become community debts if acquired during marriage for marital purposes. Debts from personal business ventures, gambling, and similar non-marital activities are not included. So, a spouse is not liable for the partner’s debt, which they did not sign for. However, the spouse’s own property could be exposed to the partner’s debt.

A good example of how community property laws can affect debt resolution is joint checking accounts. If you and your partner have a joint account into which both of your incomes are deposited, the account can be targeted by creditors. Even if your partner never signed for the debt, a creditor could legally seize or withdraw from this joint account to satisfy a judgment against you.

Under California Law, is a Spouse Liable For Their Partner's Debts?

The community property laws in California often hold both spouses liable for debts incurred by either spouse during marriage, creating a wide net for creditor actions. Community property means property acquired during the marriage. Both spouses have an equal interest in community property. It does not matter if the title is in one spouse’s name or the other or who earned the income. Debts incurred during marriage are presumed to be community debts unless incurred outside of the marriage for non-marital purposes like gambling or a separate business not benefiting the marital estate.

If you and your spouse signed a debt together, the creditor can sue you for repayment. You will be legally responsible for the debt, even if only one of you primarily used the credit or incurred the expense. In these cases, creditors are not concerned about who benefited more from the money. They simply want the debt repaid, and both co-signers bear equal responsibility.

Community property laws complicate things when the debt is only in your name. Creditors can still go after community property to satisfy debts even if your spouse did not sign the debt. This may entail:

  • A joint savings account where you both deposit your salaries.

  • The marital home, if bought during the marriage or

  • Other joint property.

Fortunately, not all assets are at risk. Your spouse's separate property, which they owned before getting married, and property acquired by gift or inheritance, are usually protected from creditors. Nonetheless, careful financial management is necessary to maintain this protection. When separate properties are combined with community property or used for shared marital expenses, they lose their separate status and become subject to creditors' claims. You should keep detailed and accurate records and avoid commingling to ensure that separate and community property are distinguishable.

In California, creditors have several ways to collect from a spouse, namely:

  • Creditors can take funds from a joint account — If both spouses’ income is put in the account, creditors can take all of it, not just one spouse’s share.

  • Wages — Wage garnishment or earnings withholding orders apply to either spouse’s earnings for community debts because wages earned during marriage are community property.

  • Real property — If the couple owns real property as community property, creditors can place liens against it, potentially leading to foreclosure if the debt is not settled.

California law provides certain safeguards and restrictions, specifically:

  • Separate debts — Debts from before marriage or after legal separation are generally the responsibility of the individual spouse. Further, creditors cannot claim the separate property of the other spouse.

  • Basic life needs — Both spouses are liable for debts incurred for food, clothing, medical health care, or similar necessities regardless of who signed them.

  • Statute of limitations — You have four years to enforce debt collection actions in California. However, creditors have one year from the estate’s probate to collect against community property when a spouse dies. Probate is the legal process of administering the estate of a deceased person. When a will exists, California probate requires verifying its validity, collecting the decedent’s property, valuing the decedent’s property, paying bills and taxes, and then distributing the rest of the estate either according to the will or California intestacy laws in the absence of a will. This is a court-appointed process for managing and distributing the decedent's assets, which protects the heirs, beneficiaries, and creditors.

Some of the strategic asset protection measures you can implement to navigate this situation include:

  • Prenuptial or postnuptial agreements — These can define property as separate or community, which can help a spouse shield their separate property from creditors if the contract is drafted correctly.

  • Asset titling — Properly titling assets as separate property can help keep your ‘separate property’ status intact, so long as this is done without violating fraudulent conveyance laws.

  • Trusts — Certain types of trusts can protect assets from creditors. However, this depends on the trust's structure and legal status.

It is important to understand these subtleties, as they can affect more than just you or your spouse individually and the marriage.

Including Your Spouse's Income in Bankruptcy in California

When you file for bankruptcy, your spouse’s income is considered, whether they are a joint filer or a non-filing spouse. The community property laws impact how much each spouse will lose.

Before you can file for Chapter 7 bankruptcy, you must pass a means test that compares your household income to the median income in California. This step helps you determine whether you qualify for Chapter 7, which involves liquidating non-exempt assets to pay creditors. If you and your non-filing spouse make more than the median income, your financial situation will be examined in greater detail. This additional evaluation will determine if Chapter 7 is still viable or if Chapter 13, which allows for debt repayment over time, is more appropriate in your case.

How your household income is calculated is important in this process. Your spouse’s income counts when filing for bankruptcy, even if they are not the one who is filing, since it contributes to the overall financial resources of your household. Most bankruptcy filings are joint because bankruptcy law assumes both partners benefit from shared income. Therefore, your spouse’s income will significantly affect your eligibility for Chapter 7 or your decision to file for Chapter 13.

If you file for Chapter 13, your spouse’s income will significantly affect the repayment plan. Chapter 13 proposes a plan to repay your debts over 3 to 5 years. This plan is based on your disposable income, the amount of money you have left over after paying your expenses. Since your spouse’s income helps cover household expenses, it influences how much disposable income is available for repaying creditors. Even if your spouse is not filing, their income is still included in the calculations. Thus, it could increase the amount you are required to repay.

There are many implications of including spousal income, some of which include the following:

  • Eligibility for Chapter 7 — Your household's income must be low to qualify for Chapter 7. If your combined income with your spouse is too high, you might not pass the means test for Chapter 7 and require further analysis.

  • Chapter 13 plan — If the household income is higher, unsecured creditors could receive higher payments, making the repayment plan more burdensome.

  • Exception choices — You can choose between two exemptions. These exemptions would not affect your income directly. However, if you decide California exemption system one under Code of Civil Procedure (CCP) 703.140 or California exemption system two under Code of Civil Procedure 704.730 of your bankruptcy exemptions, they will affect what property you can keep. Consequently, the outcome of the income calculation will also affect what chapter of bankruptcy you file.

Before you file for bankruptcy, jointly or individually, determine how each choice affects your finances. Joint filing is the process where both spouses submit one bankruptcy petition. This is easier if you share significant debt. This approach lets you pay off qualifying joint debts and may reduce overall legal fees because it is only one case. If a couple decides to file jointly, their incomes will be considered for bankruptcy, which could affect their eligibility for Chapter 7.

For example, if, as a couple, your total income exceeds the median for your household size in California, it could trigger the more complex means test. This test could result in you being directed to Chapter 13 instead. Thus, filing alone may be more strategic if your spouse earns a substantial income but has minimal personal debt. Only when you file separately is your debt wiped away. You may still qualify for Chapter 7 if your income is below the median.

One of the first things you need to do if you file individually is to keep track of your income separately. This means showing how much of your spouse’s income is allotted for personal spending versus shared household expenses. If tracking is done accurately, it can reduce the income that forms part of the estate. If, for example, your partner uses a portion of their income to pay personal loans, their credit card bills, or other costs not related to the household, like school fees, you can exclude those amounts from the means test.

For this strategy, record-keeping must be comprehensive and continuous, including pay stubs, bank statements, and receipts, to substantiate your claims. It is best to keep your expenses separate from the debts you share with your partner, as doing so maximizes your position and means they will have less impact on your ultimate bankruptcy outcome.

Due to income inclusion and exclusion complexities, you should seek legal advice from an experienced bankruptcy attorney. A knowledgeable bankruptcy lawyer will ensure you adhere to the law while shielding yourself from different legal proceedings.

They can help you claim the marital adjustment deduction, advise you on whether joint or individual filing would be more advantageous in your case, and deal with any objections from the bankruptcy trustee. Filing your case without an attorney may mean you risk making a mistake when filing. These mistakes can lead to case delays, extra payments, or even dismissal of your case.

Protecting Your Finances in Bankruptcy

Since your non-filing spouse’s income must be included in household income calculations when you file for bankruptcy, which can complicate matters, you need to minimize the effect of this income carefully.

One of the effective ways to get started is through the Marital Adjustment Deduction, which lets you exclude part of your spouse’s income used solely for their support and not the household. If you use this deduction correctly, it can help alleviate any financial strain during bankruptcy.

Under this deduction, certain qualifying expenses can be excluded from income calculation. This would include any payroll deductions directly withheld from your spouse’s paycheck. These include:

  • Taxes.

  • Insurance.

  • Retirement contributions, and

  • Union dues.

Moreover, personal debts, like loans and credit cards in your spouse’s name that are not used for household purposes, qualify to be included. Expenses related to your spouse's car payments for a vehicle that only they drive or costs related to personal hobbies are deducted from the household income for bankruptcy purposes.

Properly applying these exclusions can significantly affect how your case proceeds. In the means test for Chapter 7, you can qualify for Chapter 7 by lowering your total income below the median level and excluding legitimate personal expenses from your household income. Even if your income is still above the median, lowering it will reduce your disposable income, making it less likely for a presumption of abuse to arise and making it easier to argue that you qualify for Chapter 7. Likewise, if you file Chapter 13, lowering your household disposable income reduces what you pay back to unsecured creditors, making your repayment plan more manageable.

Effective implementation of this strategy needs good documentation. Keep a close, detailed record of your spouse’s personal expenses, including bank statements, pay stubs, and invoices. These will be important documents to verify your deductions for bankruptcy. Making sure your detailed budget separates household expenses from personal ones enhances transparency in court. Presenting a well-organized financial picture will lower the risks and challenges associated with bankruptcy trustees or U.S. trustees.

Due to the complicated marital adjustment deduction, legal advice is strongly encouraged. If you have legal representation, you are less likely to make mistakes that could cost money and prevent you from discharging your debts.

Despite its benefits, this approach does come with challenges. Trustee scrutiny is a significant concern. Bankruptcy trustees must scrutinize all financial information to ensure that the deductions are accurate and that the income calculations are not compromised. If an improper deduction is claimed, the court may object to it or look at it more closely. Therefore, accuracy is essential. If you have made a mistake in your financial details, it could hurt your case, and you may not receive discharge of your debts.

Moreover, it is crucial to consider the future implications of using this strategy. After bankruptcy, managing individual and household expenses will require continued attention. Understanding the long-term impact of the marital adjustment deduction on your shared finances is vital to avoid future financial disputes or misunderstandings.

Strategic financial planning can help you navigate bankruptcy with a non-filing spouse. Maintaining separate accounts for personal expenses can help show what qualifies for exclusion. Being transparent in managing accounts is especially important to avert any perception of concealing income. Regular expense tracking is just as essential a practice. A comprehensive record of household versus personal expenses makes it easy to assemble needed information when filing for bankruptcy.

Pre-bankruptcy planning is crucial to determining your eligibility for Chapter 7 and the repayment terms if you file under Chapter 13. Managing expenses in the months leading up to your filing can help clarify how you use your income and create a stronger case. This can include devoting all personal expenditures to separate accounts or ensuring shared expenses are accounted for.

Find a Bankruptcy Attorney Near Me

If your spouse has a strong financial situation and is considering filing for bankruptcy, you must assess your unique circumstances first. Your choice to file together or separately may impact your ability to qualify for Chapter 7 or your repayment terms under Chapter 13. Accurately assessing your household income, debts, and potential deductions is key to choosing the best path forward.

When you consult a bankruptcy attorney, you avoid making the wrong decisions or costly mistakes. Get in touch with the San Diego Bankruptcy Attorney today for individualized advice. Call us at 619-488-6168.