How does bankruptcy affect spouses?

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How does bankruptcy affect spouses?
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Filing for bankruptcy is an extreme measure of debt relief for consumers. There are two types of consumer bankruptcy. Chapter 7 bankruptcy is a legal process that removes a person's liability for certain debts, based on their inability to pay. While the bankruptcy court can forgive up to 100 per cent of the debt incurred by the individual, it is still possible that the individual's spouse can be affected. With a Chapter 13 bankruptcy, the person's debts are restructured, creating a three to five year plan for repayment of the debts. There are different effects for the spouse of the person filing, depending on the situation.

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Filing for bankruptcy is an extreme measure of debt relief for consumers. There are two types of consumer bankruptcy. Chapter 7 bankruptcy is a legal process that removes a person's liability for certain debts, based on their inability to pay. While the bankruptcy court can forgive up to 100 per cent of the debt incurred by the individual, it is still possible that the individual's spouse can be affected. With a Chapter 13 bankruptcy, the person's debts are restructured, creating a three to five year plan for repayment of the debts. There are different effects for the spouse of the person filing, depending on the situation.

When the debts are in the names of both married parties, paying the debt is a joint responsibility. When one spouse is no longer responsible for their portion due to bankruptcy, the entire balance becomes the responsibility of the other spouse. This can be a problem during divorce situations, when one spouse files for bankruptcy without the knowledge of the other spouse. When the filing spouse files a Chapter 13 bankruptcy, however, the restructuring process protects the non-filing spouse from liability. Despite a lack of personal liability, the bankruptcy proceedings might be entered in the credit report of the non-filing spouse, and can affect that spouse's future credit ratings.

If the debts are in the name of one spouse, the other spouse is typically protected from any debt-collection efforts on behalf of the creditor. Liability is limited to only consumers whose signatures are on the debt application. If the spouses are co-owners of any property, however, the filing spouse can use that property to pay creditors, even if the debt is only in the name of the spouse filing for bankruptcy.

In community property states, bankruptcy law extends to protect the non-filing spouse. In these states, any community property acquired by the spouses after the bankruptcy is protected from the creditors of the non-filing spouse. If there are creditors with claims against non-filing spouses, the creditors can only use the separate property of the non-filing spouse to settle debts.

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