It is far from uncommon for married spouses to apply for certain loans or other lines of credit jointly in both people’s names. There are occasions in which only one spouse may be named on a debt, meaning that only one spouse is liable for the debt while the other is not.
There can be an assumption that because the other spouse was not named on a debt, they will have not liability for it. Because Arizona is a community property state, this is not always the case.
Community Property State Concerns
Arizona is one of only nine community property states in the country, and this will mean that 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. Generally, community property will be all income and other assets either or both spouses acquire during the marriage, and separate property is any property a spouse acquires before a marriage or after separation or divorce.
Arizona Revised Statute § 25-211 only provides two exceptions to the presumption of community property:
- property acquired by gift, devise or descent
- property acquired after service of a petition for dissolution of marriage, legal separation or annulment if the petition results in a decree of dissolution of marriage, legal separation or annulment
Under Arizona Revised Statute § 25-213, a spouse’s real and personal property owned by the spouse before marriage and acquired by the spouse during the marriage by gift, devise, or descent, and the increase, rents, issues and profits of that property, will be the separate property of that spouse. The presumption of community acquisition of property during marriage also applies to debt incurred during a marriage, so Arizona lets either spouse take on debts and act for marital partnership.
Arizona Revised Statute § 25-215 is the state law relating to the liability of community property and separate property for the community and separate debts. This means that one person could take out an automobile loan in their own name, but there could be community liability for the debt even when the other spouse did not sign.
If a loan goes into default and a car is repossessed, a lender may sue both parties jointly for the deficiency amount to obtain a judgment. A judgment will be satisfied first from the community property, and then from any separate property owned by a spouse who contracted a debt.
How Community Property Affects Debts
All separate property and community property owned by a debtor and their spouse must be disclosed in the bankruptcy schedules filed with a court. This means that a person who files for bankruptcy without their spouse still must list their separate property as well as all of their community property.
In turn, a person will have to disclose a motor vehicle their spouse purchases even when the vehicle is titled only in that spouse’s name. A person will not have to disclose all of their spouse’s separate property.
All of a couple’s community property will become the property of the bankruptcy estate, although people can use exemptions to protect certain assets. The exemptions could allow a non-filing spouse to protect certain assets.
Again, all debts, community and separate, are to be listed on a bankruptcy schedule. This will mean that a person filing for bankruptcy must include a spouse’s credit card they took out in their own name during a marriage, even if they never used it because community liability will make both spouses liable for that debt.
Community Discharges
A bankruptcy discharge is an order releasing a person from personal liability for certain debts, and creditors cannot contact or pursue people for outstanding debts. Many people wonder what happens to their non-filing spouses in these cases and whether creditors will still be able to pursue them.
When a married person filed for bankruptcy in Arizona, they can be eligible for what is known as a community discharge, under which even just one spouse filing for bankruptcy petition will mean that the entire marital union gets the discharge. As a result, both spouses will be protected from the claims of creditors for debts included in the bankruptcy.
This means that a non-filing spouse’s wages cannot be garnished because their wages are community property, and creditors cannot reach into bank accounts holding community funds. It needs to be noted that protection for the spouses will not extend to the non-filing spouse’s separate property, as creditors may still be able to pursue that.
This means that a spouse who inherits a sizable asset would have that asset as separate property. If their spouse files for bankruptcy after having a motor vehicle repossessed and receives a discharge, creditors could still potentially seize the spouse’s inherited asset.
Should Spouses File Jointly?
Unless all of the debt in marriage was incurred by one spouse prior to marriage, married couples are usually advised to file bankruptcy jointly. There may be some reasons for just one spouse to file bankruptcy even when there is significant community debt.
Spouses could choose not to file bankruptcy jointly if they are hoping to preserve a good credit score. When debt is solely in the name of one spouse and a non-filing spouse does not own any separate property, this could be a smart move for a couple that intends to stay married.
The important consideration here is that if the marriage does end through a divorce, legal separation, or death, a non-filing spouse can become subject to collection on the debt. Community property will become separate property upon termination of the marital community and no longer enjoys the protection of the bankruptcy community discharge.
Contact Our Arizona Bankruptcy Law Firm
Are you and your spouse wondering whether it will make more sense to file bankruptcy together or are you thinking only one of you is going to file? You will want to talk to DebtBusters about your case because we can advise you on the best steps to take in your case and we will help you protect all of your assets well into the future.
Our firm understands how confusing Chapter 7 and Chapter 13 bankruptcy can be for most people, so we take the time to walk people through the entire process and make things as simple as possible. Call (866) 223-4395 or contact us online to set up a free consultation with our Arizona bankruptcy law firm.
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