The short answer is community debt will be discharged but not the non-filing spouse’s individual debt. Yet, it is not uncommon for only one spouse to file for Bankruptcy Protection. This frequently takes place where the other spouse has very little debt, is simply an authorized user on the account, or only has community debt. For instance, if $45,000 is owed by one spouse and only $3,000 by the other, it often makes sense only for one of the spouses to file and the other to keep the $3,000 in debt for Credit Reasons.
The Bankruptcy Estate of an individual spouse filing in California includes that individual’s assets, as well as most if not all of their spouse. This is the Bankruptcy Estate also includes community assets and California is a community asset state. Community assets are property acquired by either spouse during the marriage, except by gift, inheritance or as income from property owned prior to the marriage. Thus most Debtors are surprised when they are advised to list in their Bankruptcy Petition all assets that were incurred during the course of the marriage, including those of the other spouse, without some other intervening event (premarital agreement, post marital agreement, separate property inheritance/gift/etc).
Likewise, they are also surprised that they must also list most if not all of their spouses debts incurred during the marriage since those debts are also generally community debts, even if only one of the spouses signed for the debt. The exceptions are debts incurred for the purchase of real estate, leases, and guarantees on debts which must be signed for by both spouses. Yet the good news is that the non-filing spouse receives a discharge of the community obligations without even filing!
Community Discharge: Subsection (a) of 11 U.S.C. §524 addresses the split discharge, when only one spouse attains a discharge in bankruptcy in California. The legislative history of this section says that “if community property was in the [bankruptcy] estate and community claims were discharged, the discharge is effective against the community creditors of the nondebtor spouse as well as of the debtor spouse. House Report No. 95-595, 95th Cong., 1st Sess. 365-6 (1977), Senate Report No. 95-989, 95th Cong., 2d Sess. 80 (1978).
§ 524(a)(3) provides the nondebtor spouse a discharge in a community property state when the nondebtor spouse is liable on the community claim, but does not file for bankruptcy petition. The marital community continues as long as the husband and wife remain married, neither dies, and they live in a community property state. In re Kimmel, 378 B.R. 630 (9th Cir. BAP 2007); Burman v. Homan (In re Homan), 112 B.R. 356, 360 (9th Cir. BAP 1989). As commentators have stated: …the Devil himself could effectively receive a discharge in bankruptcy if he were married to Snow White. If [the Devil] does not treat her better than his creditors, [Snow White] will, by divorcing him, deny his discharge. In re Kimmel, 378 B.R. 630 (9th Cir. BAP 2007).
Authorized User Discharge: Authorized users on accounts are also not liable on the accounts since they never co-signed for the debt. Therefore they are never entitled to a discharge since only the signing party receives a discharge. Notwithstanding, if the authorized user is the spouse of the filing party, as is often the case, then that party would receive the benefit of the community discharge as well for reasons noted above. As a side note, as a matter of practice an individual that files for bankruptcy that has authorized user debts should list those debts to avoid any later liability that might arise if they were mistaken as to their authorized user status.
So the good news is that in California, often only one spouse needs to file for bankruptcy protection and can obtain a discharge for the non-filing spouse. Of course the exception to this would be if some accounts are directly owed by the other spouse either Individually or Jointly.
Written by Michael G. Doan– Owner of the Carlsbad Bankruptcy Attorney Office, Michael also manages his business and is a highly skilled San Diego Bankruptcy Attorney with over 18 years of experience as a Certified Bankruptcy Specialist in Consumer Bankruptcy Law by the American Board of Certification.