Bankruptcy Options For Debtors In Community Property States

When I meet with a married couple that are considering a Chapter 7 bankruptcy, one major consideration that needs to be addressed is whether or not to file for both, or only one of the spouses.

I practice in Louisiana.  Louisiana is a community property state.  This means that all the assets acquired after the marriage and all of the debts incurred after the marriage are owned and owed by both spouses equally.

The joint ownership of the debts and assets by both spouses has advantages and disadvantages to a couple:  the disadvantage is that a creditor of a Louisiana debtor can go after both the separate assets and community assets of either spouse to satisfy the debt owed to that creditor.   (There are issues of reimbursement by one spouse to another spouse for the use of their separate property to satisfy a community debt that are not important to this discussion.  Also, this discussion does not address the rights of a couple to enter into a prenuptial agreement and the effect such an agreement would potentially have on the rights of creditors).

The advantage is that either spouse can file individually in a community property state and discharge the community debts.

Why is this the case?

Because when a bankruptcy is filed you must include all of your assets and debts.  Section 541(a)(2) of the bankruptcy code includes community assets as assets of the “Estate.”

There are many practical reasons to have only one spouse file:

• The filing gives both the debtor spouse and the non-debtor spouse an automatic stay of all collection proceeding, including repossessions, as well as legal proceedings, such as foreclosures and  garnishments;
• The discharge covers both spouses; and,
• If necessary, the non-filing spouse could, if necessary, file another Chapter 7 at a later time.  This can be particularly important if the couple has additional financial issues, and less than 8 years has passed since previously filing.

There are some reasons why both spouses may want to file anyway:

• In some states that use state exemptions, the spouses may be able to get a larger homestead exemption for their house.  Some states allow each spouse to claim a homestead exemption on real estate, and some states have a larger homestead exemption for a married couple than is permitted for an individual.  This can be particularly important if the home has more equity than is permitted under state law.  (Since the Louisiana homestead exemption of $35,000.00 is a single exemption regardless of whether the debtor is an individual or a couple, this is not an issue for my clients).
• There are some Courts that have ruled that since only the community property is protected by the discharge, the creditor is still free to go after the separate property of the non-filing spouse to satisfy the community debt.
• There is debate within the legal community as to whether or not a creditor can continue to contact a non-filing spouse about a discharged debt; and,
• As BLN writer David Leibowitz pointed out in his article Can I file bankruptcy without my wife?  Can I file bankruptcy without my husband?, you will still need to include the full income of the non-filing spouse when determining income for purposes of the household means test income.

The decision of whether or not to file as an individual or a couple, as well as the decision on the right type of bankruptcy to file, should only be made after consulting with an experienced bankruptcy attorney.