Should You File Bankruptcy Before You Get Married?

Money, Relationships

bankruptcy and marriagePreparing for a wedding is stressful enough without adding financial troubles on top of it. But if you’re facing insurmountable debt, you may be considering bankruptcy, and wondering if it’s best to declare bankruptcy before marriage or after. What’s better? How will your bankruptcy affect your spouse and your marriage?

Marriage: What’s Mine Is Yours. Or Is It?

First, a little background on marriage and credit. Your assets and debts upon entering marriage are yours. Your spouse is not responsible for the debts you bring into the marriage unless they agree to take it over. And because credit scores are given to individuals, not couples, your spouse’s credit score will not be affected by your debt or your bankruptcy.

Here’s where it gets tricky: once you marry and begin commingling (e.g., you and your spouse open a joint bank account together), property you share with your spouse may become subject to paying off your debts. For example, you both deposit money into your joint bank account and use money from that bank account to pay your car note every month. The car can be considered your property in part, and may be used to pay off your debts. Situations like this occur more frequently in the community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

Because the laws vary from state to state, you should talk to a lawyer, especially if you live in one of the community property states.

Consequences of Bankruptcy Before and After Marriage

Now a little background on bankruptcy. The two most common types of bankruptcy for individuals are Chapter 7 and Chapter 13. In Chapter 7, unsecured debts (including credit card bills, hospital debts, and personal loans) are wiped clean, but other debts (including income taxes and student loans) remain. It’s for people who have little to no assets and/or income and a lot of debt. In contrast, Chapter 13 is for people who have income and can pay back the debts eventually. Under Chapter 13, a plan is created to pay off the debts within five years.

So how does all this affect your spouse? If you settle the terms of your bankruptcy before getting married, you will keep your spouse’s finances out of it. That means that their property will not be used to pay off your debts. If you declare bankruptcy after marriage, some of your spouse’s property may be used to pay off your debts, as described above. Again, this is especially of concern for someone living in a community property state.

Whether you declare bankruptcy before or after marriage, you will find it harder to get a loan as long as the bankruptcy stays on your credit report (Chapter 7 usually stays on for ten years and Chapter 13 for seven). Some couples choose to let the spouse with the higher credit rating apply for mortgages and other loans in their name only, as the interest will be significantly reduced.

Waiting to Declare Bankruptcy

If you decide for any reason to wait until after marriage to declare bankruptcy, then do what you can to protect your spouse from having to take on your debts. Do not commingle funds – that means no joint bank accounts and no loans taken out in both your names. File taxes separately. You may also consider drawing up a prenuptial agreement that lays out some of your financial issues. Definitely find a lawyer in your state to advise you on how best to protect your spouse’s assets.

This is also a good opportunity to speak with your future spouse about finances and how you plan to handle them in your marriage. Do it now, and hopefully you will avoid one of the main causes for divorce: money.