A little known secret about bankruptcy in Washington is that you can get most of the benefits of a bankruptcy discharge even if your spouse filed and you don’t. This is so because of Section 523(a)(5) of the bankruptcy code, a little known provision that applies to a bankruptcy discharge in a community property state. So the provision is helpful in Washington, but not in Oregon.
Spouses aren’t required to file bankruptcy together. They can file together, but they don’t have to. But even if only one spouse files, all of the community property of the couple is regarded as property of the bankruptcy estate. Of course in Washington, this ultimately rarely matters because the available exemptions which can be used to protect personal or real property are extremely strong.
The upshot is that the community property of the filing and non-filing spouse are at least theoretically at risk in bankruptcy, the reality is that in practice this is almost the case. In fact, if it were the case, you would probably not be filing Chapter 7.
So what happens is that there is a tradeoff: For almost no practical risk during the bankruptcy, you get a big benefit at the end. The community property gets a bankruptcy discharge. What does this mean?
The discharge doesn’t just protect the property that the couple owned when one spouse filed bankruptcy from creditors, it protects all the community property that they acquire in the future. Where this really comes into play is with post-bankruptcy wages.
You would think that if a creditor waited for the filing spouse’s bankruptcy to come to a close, it could then take the judgment that it had against the non-filing spouse and start garnishing away. But it can’t, the wages are community property as long as the filing and non-filing spouse remain married.
This impacts any creditor that had claims against the community property when the bankruptcy was filed. Not just creditors of the debtor, the person who filed bankruptcy. The creditor’s claim could be one against the non-filing spouse, and the discharge protects the non-filer’s community property.
After the bankruptcy discharge for the filing spouse, a creditor of the non-filing spouse can really only enforce its debt against the separate property of the non-filing spouse such as property acquired before marriage, or obtained by gift or inheritance to the non-filing spouse during the marriage.
Now this doesn’t bar a creditor from suing a non-filing spouse after discharge but it does severely limit the assets that can be seized from a non-filing spouse. The upshot is that if you are married and considering filing bankruptcy in the state of Washington and one of you wants to file and the other really doesn’t, the non-filer among you may be safer than you think.
Please feel free to set an appointment at one of our bankruptcy law offices in Portland, Vancouver, Tacoma or Seattle if you have any questions about how you can use the bankruptcy protections for the non-filing spouse to your advantage in Washington. You can see us in Salem and Sandy as well, but I am guessing that if that’s the office that is convenient to you, this community property stuff is probably not-particularly helpful to you. Please also feel free to set a phone or video appointment with me if you have any bankruptcy questions at all.