Although the insolvency declaration afforded by the bankruptcy laws of the United States is an individual process, married couples can expect certain consequences even if only one spouse goes through it. Most couples are concerned about the potentially negative impact to their credit reports, but there are also legal issues related to property that must be taken into account.
<strong>Credit Reporting and Scoring Issues</strong>
With regard to credit history and scores, debts that are held jointly will only be discharged for the spouse who goes through the bankruptcy process; the other spouse may still be obligated to repay outstanding debt on accounts that are not discharged.
The spouse who files for bankruptcy will certainly see his or her credit history blemished by the filing; this should not happen to the other spouse, but it can be corrected by contacting the credit bureaus if it does. As far as credit scoring goes, if the spouse continues to pay non-discharged debts, it should not be affected.
<strong>Marital Property Issues</strong>
Insolvency laws are part of the U.S. Code; however, property laws are dictated by state laws that bankruptcy courts must observe. In general, there are two categories of property rights as they apply to married couples: common law and community. In jurisdictions where common law property rights prevail, marital property is ruled by the principles of equitable distribution. In states where community property rights prevail, assets acquired during the marriage are considered to be jointly held unless the spouses draft and execute legal agreements to keep certain things separate.
As of 2018, the following states observed community property rights:
* Alaska (optional)
* New Mexico
Marital property does not generally escape bankruptcy proceedings insofar as having to declare assets to the court; this means that both spouses will have to disclose their respective personal property, but the appointed trustee will include or exclude assets as per state laws.
In community property states, jointly held debts may be fully discharged and each spouse will be responsible for outstanding personal debts; for this reason, creditors in community property jurisdictions will only extend loans or credit cards to spouses on an individual basis.
The best course of action for married couples who plan on filing for bankruptcy is to consult with an attorney and determine if they should apply property separation strategies prior to declaring insolvency.