Today I want to talk about an issue that is important to every married couple considering bankruptcy—whether both spouses should file.  The question comes up particularly often with families who arrange their finances so that most or all of their property is registered in the name of only one spouse.  The answer in Arizona is that it is usually better for both spouses to file together.  Although in most cases it may be sufficient for only one spouse to file, there are generally no benefits to be gained from doing so. Here’s why.

Arizona is a “community property” state.  This means that all property acquired during marriage is presumed to be jointly owned by both spouses (the exception to this rule is property acquired by gift or inheritance).  Similarly, all debts acquired during marriage are presumed to be a joint liability of the spouses.  This presumption of joint ownership or joint liability applies even if only one spouse’s name is on the title to the property, or only one spouse signed the loan documents.  For example, let’s say you buy a car, obtain a loan for the purchase price, and put the title and the loan in your name only.  If you are married, the presumption is still that both the car and the loan are jointly held by you and your spouse.  To overcome this presumption, you would have to produce specific evidence showing that the property or debt belongs only to you, for example because you purchased the property with your separate assets, or because the debt did not benefit the marital community.  There is an exception to this rule as well—real estate (land) normally does not become community property, and debts related to real estate do not become community debts, unless the relevant documents are signed by both spouses.  The bottom line, however, is that most assets and debts acquired during marriage belong to the marital community, and both spouses own them jointly (in the case of property), or are jointly liable for them(in the case of debts). 

So, what does all of this have to do with filing for bankruptcy?  Well, under the Bankruptcy Code, when only one spouse files for bankruptcy, all of the community property and community debt (property and debt held by the spouses jointly) is brought into the bankruptcy proceeding.  This means that spouses cannot protect community property from bankruptcy by having only one spouse file.  In addition, in most cases the non-filing spouse’s income will have to be included in the various bankruptcy tests related to income, and if the bankruptcy requires payments to creditors from future income (i.e. it’s a Chapter 13 or Chapter 11 bankruptcy), then the non-filing spouse’s income will usually be included in determining the payment amount.  Thus, having only one spouse file will not usually protect the other spouse’s income from being included in the bankruptcy.

On the other hand, if one spouse files for bankruptcy, and receives a discharge at the conclusion of the case, the discharge applies to all community debts, even if the other spouse did not file.  This means that none of the spouses’ community property will be liable for these community debts, even if the property is acquired after bankruptcy.  However, if the spouse who did not file for bankruptcy is separately responsible for a debt, that responsibility will not be removed by the bankruptcy.  So, to provide an example, let’s say that you obtain a credit card in your name only—your spouse does not sign any of the documents.  You use the credit card to make various purchases.  If you then file for bankruptcy and obtain a discharge, neither you nor your marital community is any longer liable for this debt, and your spouse was never separately liable because he/she didn’t sign any of the documents.  That means the creditor cannot collect the debt from any property owned by you, your spouse, or the two of you jointly.

Now, let’s say that you sign up for the same credit card, but instead of you filing for bankruptcy, your spouse files, and you don’t.  In this case, if your spouse obtains a discharge, your and your spouse’s community property is no longer liable for the credit card debt, and the creditor cannot collect the debt from any property you own jointly with your spouse.  However, your personal liability continues, and if you later acquire separate property (e.g. through a gift, inheritance, or because of a divorce), the creditor will be able to collect the debt from your separate property.

To sum up, while it may be possible for only one spouse to file for bankruptcy, it is not advantageous to do so if the non-filing spouse may have personal liability for any debts.  Because it is often difficult to determine in advance whether there may be personal liability for a debt, and because in most cases there is no benefit to be gained from one spouse not filing, it is generally better for both spouses to file together. 

Are there any situations when having only one spouse file for bankruptcy is beneficial?  Yes.  For example, if one spouse has significant separate property (e.g. property acquired before marriage, or by gift or inheritance), and this property would not be exempt in bankruptcy, that spouse may decide not to file in order to protect this property.  Another example is if one of the spouses doesn’t qualify for bankruptcy because of a previous bankruptcy filing, or would not be able to receive a discharge.  Yet another example involves cases where the spouses had signed a premarital agreement dividing their property and debt between themselves and reversing the presumption of joint ownership, and where a joint bankruptcy filing would make the spouses ineligible for the desired type of bankruptcy because either their combined income or their combined debts are too high.  Of course, this list is not exhaustive, and there may be other circumstances when a separate filing by only one spouse may be useful.

Remember, every situation is different.  The above is intended only as a general overview of the law at the time of this writing, and not as legal advice with respect to your particular situation.  If you reside in Southern Arizona and would like to find out whether a joint or separate bankruptcy filing is advisable, please contact a Tucson bankruptcy attorney at Yusufov Law Firm PLLC for a consultation.

A question I am often asked by clients is "When do I file for bankruptcy?"  If you are considering bankruptcy, it is important to time the bankruptcy filing so that you can take the most advantage of the benefits of bankruptcy, and avoid the pitfalls created by filing too early or too late.  There are many reasons why delaying or accelerating filing for bankruptcy may be beneficial.  For example, if you are expecting to incur necessary expenses that would be dischargeable in bankruptcy, such as medical bills, then it is advisable to delay the filing until after you incur these expenses.  That way, you can discharge these expenses through the bankruptcy.

Another common reason to delay filing is if a presumption of non-dischargeability applies to a certain debt you owe because it was recently incurred.  For example, under the Bankruptcy Code, consumer debts over $550 for "luxury goods or services" are presumed non-dischargeable if incurred within 90 days before the bankruptcy filing.  Delaying bankruptcy in such cases may make it easier to show that the debt is dischargeable.

On the other hand, a bankruptcy filing may need to be accelerated if you are trying to protect your interest in property that may be taken away by a creditor.  The most common example of this is if you are trying to protect your home from a foreclosure.  While bankruptcy can help you save your home from a foreclosure, in most cases it will only work if you file before the foreclosure takes place.  If you file too late, after the foreclosure already took place (even if you file later on the same day), you will not be able to keep your home in almost every case.

Ultimately, however, you will need to consult with an experienced bankruptcy attorney to determine when you should file (If you are in Southern Arizona, you will need a Tucson bankruptcy attorney, as your case will need to be filed in Tucson).  The biggest mistake most people make is trying to deal with their debt problems on their own until the very last moment.  They usually only seek professional advice when they are faced with an imminent and cataclysmic threat, such as a foreclosure or a collection action by a creditor.  Unfortunately, at that point it is often too late to fully take advantage of the benefits bankruptcy can offer, and in extreme cases bankruptcy may no longer offer any benefits at all.  Keep in mind also that in most cases an attorney will need time to prepare the necessary documents for filing bankruptcy, so you want to make sure that you start the process early enough to give your attorney the time to properly prepare your case.  Therefore, my best recommendation is to seek professional advice as soon as your debt problems begin, so that you know all your options and can plan ahead.  Most bankruptcy attorneys offer a free consultation.