When people marry in Arizona, they agree to form unions under which they take on all of their partner’s assets and liabilities. As one of only nine community property states in the nation, the presumption in a bankruptcy case is that both spouses equally own all property they acquired during the marriage unless there is an enforceable agreement to the contrary. As a community property state, there can also be an assumption that spouses in Arizona must file bankruptcy together.
The truth is that people are still able to file on their own, but there can be differences between how things will go in Chapter 7 and Chapter 13 cases.
File Bankruptcy Chapter 7 Without a Spouse
Filing for Chapter 7 bankruptcy is always easier than filing for Chapter 13 because it is a much quicker process that can usually be wrapped up in a matter of months as opposed to the three to five years a Chapter 13 repayment plan will last. Chapter 7 will allow a person to get rid of all their unsecured debts, such as credit card bills, medical expenses, and personal loans.
Not all debt is community property, as assets owned before a marriage or acquired by gift or inheritance during a marriage will be separate property. In Chapter 7 cases involving a spouse whose separate property accounts for a majority of their debts, then filing for bankruptcy may provide financial relief without harming the spouse.
The trick with Chapter 7 is that a person who is filing who is married will have their spouse’s income and belongings included in their bankruptcy calculations. Qualifying for Chapter 7 bankruptcy will mean that a person’s total household income must pass the bankruptcy means test by being less than Arizona’s state median income.
If a person files an individual bankruptcy petition as a married person, their total household income still must include their spouse’s income, and the income will be combined and averaged over the previous six months before a person files. Qualifying for Chapter 7 bankruptcy can be much more difficult in these situations, especially when households have two spouses earning incomes.
Another possible issue in a Chapter 7 bankruptcy case could be a spouse’s property not being protected by bankruptcy exemptions. Several Arizona bankruptcy exemptions, such as the $150,000 homestead exemption, will not increase just because a person is married.
Some other Arizona bankruptcy exemptions will only increase slightly when a person is married. The standard motor vehicle exemption of $6,000 increases to $12,000 in one vehicle or $6,000 each in two vehicles if a person is married, but a person and their spouse who have disproportionate separate property debts can often mean that some possessions will not be protected by Arizona’s bankruptcy exemptions.
File Bankruptcy Chapter 13 Without a Spouse
Filing Chapter 13 bankruptcy without a spouse will be far more complicated than filing Chapter 7 without a spouse. First of all, a repayment plan in Chapter 13 typically lasts either three or five years, depending on how a person’s household income compares to the state median.
While this period can be a longer period for a financial situation to be frozen by an automatic stay, is it also enough time for problems within a marriage to lead to divorce. A divorce will become infinitely more complicated during a Chapter 13 bankruptcy.
When a person files for Chapter 13 bankruptcy, their debts are reorganized into a payment plan that is based on their disposable monthly income. Even if a person files as an individual, their payment plan will still be formulated using their disposable monthly household income.
A spouse may not want all of their spare income going towards a Chapter 13 payment plan without being included. Spouses will need to work together closely to find solutions in Chapter 13 cases.
Community Property in an Individual Bankruptcy
Even when people want to file bankruptcy because of numerous separate property unsecured debts, they may still have community property debts that cannot be excluded from their bankruptcy case. Filing for Chapter 7 bankruptcy will not erase the mortgage on a community property home.
Balances for lesser secured community property debts, such as cars, may be paid off in a Chapter 13 bankruptcy payment plan. This becomes more complicated if a person discharges unsecured community property debts in an individual Chapter 7 bankruptcy.
If a person files for bankruptcy individually, community property debts are only discharged in their name. If a spouse declines to join them in the bankruptcy filing, the separate property debts are not discharged and community property debts will not be discharged in their name.
The protection of the automatic stay mean that creditors for community property debts cannot pursue people or their spouses during bankruptcy. However, automatic stays end when cases are discharged or dismissed.
If a person divorces in Arizona, their community property creditors will likely pursue their spouse for the debts discharged in the bankruptcy.
Protecting Yourself
Spouses should take active roles in their partner’s bankruptcy filing, even when they are not signing the paperwork. People can do a number of things to show support for a spouse filing for bankruptcy, such as attending consultations or other meetings or helping them gather documents necessary to draft a bankruptcy petition.
All spouses are going to want to know how bankruptcy filings will affect both spouses, so it is always best for married couples to work with an experienced Arizona bankruptcy attorney who can fully explain how a bankruptcy filing will affect both spouses. You deserve to know all of the long-term effects of any filing.
Contact Our Arizona Bankruptcy Law Firm
If you are wondering whether it will be more beneficial for you and your spouse to file bankruptcy together or separately, you are going to need to retain legal counsel without delay so you can get answers to all of your questions. DebtBusters will be happy to take the time to sit down with you and completely go over your entire case so you can understand all of your options and make the choice that will best suit your long-term goals.
Our firm knows how stressful and confusing Chapter 7 and Chapter 13 cases can be, so we make sure that people know what is going on and help them understand everything that we are doing in connection to their cases. You can call (866) 223-4395 or contact us online to receive a free consultation with our Arizona bankruptcy law firm.
Related Content: How Much Does It Cost to File Bankruptcy in Arizona?
