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The Winter Law Group June 14, 2022

In California marriages, there is separate property/debt and community property/debt. The former is what you had prior to the marriage, and the latter is everything you and your spouse incurred during your marriage. As with anything else, there is also a considerable gray area between what is separate property and what is marital property.

Figuring it all out during a divorce is one thing. Figuring it out in bankruptcy is quite another. If you are considering bankruptcy as individuals or as a couple, you should know how bankruptcy will affect each of you.

The Winter Law Group helps clients considering bankruptcy in Fresno, Madera, Clovis, Merced, Visalia, Merced County, and Madera County, California, understand the advantages, disadvantages, and implications of bankruptcy among spouses.

What Property Is Separate vs.
Community Property in California?

The preceding information about separate property and community property provides a basic understanding of what comprises each. However, we should address those “gray areas” in the context of how bankruptcy affects the spouse.

There are numerous opportunities for separate property to become commingled during the course of a marriage. For example, you purchased a house before you married. Your name is on the deed, and you pay the mortgage. After marriage, you may not add your spouse’s name to the deed but you pay the mortgage out of your joint checking account. Although part of the value of your house is separate, the value of commingled funds used to pay the mortgage blurs the line between separate and community property.

Another common example, particularly pertinent to bankruptcy, is that credit card you had before you were married. You were the only person to sign the credit card agreement and only your name appears on the account. However, after you were married, you used the credit card to purchase things that benefit both of you, such as airline tickets for vacations, furnishings for your home, or groceries. The community use of that separate credit card makes the discharge of that debt subject to interpretation.

What Are the Pros and Cons of Filing
for Bankruptcy as an Individual?

One of the major pros of filing for bankruptcy as an individual is allowing your spouse to keep their credit score. As you know, bankruptcy has a negative impact on your credit report for a period of time. Most of the time, your credit score is already poor by the time you file, but if your spouse's is not, filing individually might allow them to maintain a good credit score which benefits both of you.

If you can clearly delineate your separate property and debt from your spouse’s, being able to discharge or restructure your debt through bankruptcy benefits both of you. However, if there’s evidence of comingling of non-exempt assets and debt, you put your spouse’s separate property into play as well as yours to satisfy creditors.

Also, if you file individually, only your income will be calculated which may qualify you to file for a Chapter 7 bankruptcy, which discharges all qualified debt, instead of a Chapter 13 bankruptcy which restructures debt.

What Are the Pros and Cons of
Filing for Bankruptcy as a Couple?

If you choose to file for bankruptcy as a couple, all debts and assets are on the proverbial table. All dischargeable debt can be discharged or reduced and restructured, and all non-exempt assets will be used to satisfy creditors. This simplifies the process and leaves you both with a fresh financial start.

Filing jointly also affects both of your credit scores negatively which means neither of you will qualify for loans or credit for a period, or you will pay significantly higher interest rates if you do.

What Factors Should I Consider?

The major factors to consider before deciding whether to file for bankruptcy as an individual, a couple, or at all, are income, dischargeable or qualified debt, and assets that are protected in the bankruptcy chapter you choose to file.

This calculus isn’t easy for most couples. That’s why working with an experienced bankruptcy attorney is where you should begin the process. You don’t want to file first, then realize the implications later.  

Skilled & Compassionate Counsel

At the Winter Law Group, we understand the impact bankruptcy has on couples filing individually or jointly. We also know that every situation is unique, so we take the time to get to know you and your financial situation so we can provide the skilled and compassionate counsel and guidance you need to make such a major decision about your financial future.

If you are considering filing for bankruptcy in or around Fresno, California, count on our experience to help you explore your options. We are prepared to help. All you need to do is call to schedule a consultation.

Find out how a California bankruptcy will affect your spouse. Call the Winter Law Group today.