Spouses typically apply for loans and credit cards jointly, in both of their names. This makes each of them contractually liable for the debt. But occasionally debt is taken out in only one spouse’s name during marriage. In these situations, the spouse named on the debt is contractually liable for the debt, and the other spouse is not. People often mistakenly assume this means the un-named spouse has no liability for the debt, and therefore need not consider filing bankruptcy if the debt isn’t paid. Unfortunately, that is not a correct assumption here in Arizona.
Arizona is one of nine community property states in the United States. In community property states like Arizona, there is a presumption that both spouses equally own all property acquired during their marriage, absent an enforceable agreement to the contrary. In other words, property acquired during marriage generally belongs to the “marital community”. Arizona law provides two exceptions to the presumption of community property: 1) property acquired by gift, devise or descent; and 2) 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. Arizona Revised Statutes, A.R.S. § 25-211. Property that does not belong to the marital community is the separate property of the spouse who owns it, including property acquired by one of the spouses prior to marriage. A.R.S. § 25-213(A).
The presumption of community acquisition of property during marriage likewise applies to debt incurred during the marriage. With a couple exceptions, Arizona law allows either spouse to contract debts and otherwise act for the benefit of the marital community. A.R.S. § 25-215(D). So, your spouse can sign for an auto loan to purchase a car without your involvement, and you have community liability for the debt even when you were not a party to the contract. Should the loan go into default, and the car get repossessed, the lender can sue you jointly with your spouse for the deficiency amount and obtain a judgment. The judgment is satisfied first from community property, and second from any separate property owned by the spouse who contracted the debt. With respect to debts incurred by your spouse prior to marriage, your separate property is not liable for the separate debts of your spouse, absent an agreement to the contrary. A.R.S. § 25-215(A).
All separate property owned by the debtor, and community property owned by the debtor and his/her spouse, must be disclosed in the bankruptcy schedules filed with the court. Therefore, if you file bankruptcy without your spouse, you must list your separate property as well as all community property. For example, if your non-filing wife purchased a vehicle while you were married, that vehicle must be disclosed in your bankruptcy schedules, even if it is titled in just her name. But you are not required to disclose your spouse’s separate property. With a few exceptions, the debtor’s separate property, and all community property, becomes property of the bankruptcy estate upon filing a bankruptcy petition. There are, however, exemptions available to protect certain assets, not only for the benefit of the bankruptcy debtor but also his or her non-filing spouse.
Similarly, all debts, both separate and community, are listed in the bankruptcy schedules. If you are filing bankruptcy without your spouse, and your spouse has a credit card in his or her name with a balance that was incurred while you were married, you must disclose it as a community debt in your bankruptcy schedules. Although you don’t have contractual liability for the debt, you do have community liability by virtue of your marriage.
The bankruptcy discharge is a court-ordered injunction prohibiting collection of pre-petition debt. It permanently bars creditors from pursuing the debtor who filed bankruptcy for payment. But what about the non-filing spouse of the debtor? Can creditors still pursue him or her for collection on debt that was incurred during marriage?
In the bankruptcy world, there is something called a “community discharge”. Even when only one spouse files a bankruptcy petition, the marital community also receives a discharge. This means that the marital community is protected from the claims of creditors for debts included in the bankruptcy. For example, the non-filing spouse’s wages can’t be garnished because his or her wages are community property. Likewise, creditors cannot reach a bank account holding community funds. However, the protection for the marital community does not extend to the non-filing spouse personally. Creditors can still collect against any separate property owned by the non-filing spouse.
Below is a hypothetical to illustrate how a non-filing spouse’s separate property is at risk following a community discharge:
Wife inherits a boat from her father during marriage. The boat is her separate property because inheritance is an exception with respect to community property in Arizona. Husband signs for an auto loan in his name during marriage and defaults on the payments. The vehicle is repossessed, and lender obtains a judgment against both husband and wife for the deficiency balance. Husband files a Chapter 7 bankruptcy without wife; he and their marital community receive a bankruptcy discharge. Creditors can potentially seize wife’s boat as it is her separate property and not protected by the community discharge.
Unless all debt was incurred by one of the spouses prior to marriage, and therefore that particular spouse’s separate debt, married couples usually file bankruptcy jointly. However, there can be good reasons for just one of the spouses to file bankruptcy, even when there is community debt. Some spouses choose to opt out of filing bankruptcy jointly to preserve their good credit score. If the debt is solely in the name of the filing spouse, the non-filing spouse does not own any separate property, and they intend to stay married, this can make sense. But it’s important to know that should the marital community terminate, such as through divorce, legal separation, or death, the non-filing spouse becomes subject to collection on the debt. This is because community property becomes separate property upon termination of the marital community, and thus, is no longer protected under the bankruptcy community discharge.
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