When a married couple face bankruptcy, they can file jointly, one can file while the other doesn't or they can file separately at the same time. The choice to file separately or jointly has important consequences on how bankruptcy affects marital assets and marital debts. Those consequences vary depending on whether you live in a state that follows community property law or common law.
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Community Property States
Most states are common law property states. The select few community property states include Arizona, California, Idaho, Nevada, New Mexico, Washington, Idaho, Louisiana and Wisconsin. If you happen to live in a community property state, then you need to be aware of some important rules regarding community property and community debts in bankruptcy. In a community property law state, both spouses are jointly liable for any debt incurred by either spouse during marriage. Each spouse is separately liable for any debts incurred before marriage. In a common law state, on the other hand, each spouse is only liable for debts assumed by that spouse. The same rules apply to property ownership.
One of the primary purposes for filing for bankruptcy is to obtain a debt discharge. When a married person files bankruptcy separately the debt discharge applies only to that person's separate debts. The debt discharge will not discharge either joint marital debts or the nonfiling spouse's separate debts. This could result in bankruptcy being ineffective for you and your spouse if all or most of your debts are jointly held by you and your spouse, or if your spouse is separately liable for most of the household debts.
Community Property Debts
Somewhat surprisingly, a spouse who files bankruptcy separately may be able to discharge the nonfiling spouse's liability on certain debts, at least in a community property state. In a community property state, the debt discharge relieves both spouses from their obligations on all joint debts, even if only one spouse files separately. Contrast that with a common law state where only the filing spouse's separate debts are discharged, while joint debts remain enforceable against the nonfiling spouse.
On the other hand, filing for bankruptcy separately can help protect some of your spouse's property from bankruptcy liquidation. When you file for Chapter 7 bankruptcy you expose your assets to the bankruptcy trustee and the liquidation process. The trustee has authority to sell all of your nonexempt property. The bankruptcy trustee has no authority, however, to sell your spouse's separate property if your spouse does not file bankruptcy with you. So, if one spouse owns a majority of the household property, then it might make sense for the other spouse to file bankruptcy separately.
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