Legal Separation’s Effect on Bankruptcy - Westgate Law

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Legal Separation’s Effect on Bankruptcy

westgate law, southern california bankruptcy lawyers, filing bankruptcy, filing for bankruptcy, legal separation and bankruptcy, filing bankruptcy during separation, filing bankruptcy when separatedMany people experience extreme financial distress during the same period when they are experiencing equally extreme distress in their relationship. We aren’t here to discuss if one situation is a catalyst for the other, but to outline how a legal separation alters the affect of bankruptcy on the filer and the filer’s spouse (from which they are legally separated). Even more importantly in some cases are the potential ramifications on a spouse’s business one party in the legal separation files for bankruptcy.

The Big Question: When legally separated, how will filing bankruptcy affect a spouse? Will it negatively affect his business?

When considering the questions that come from a bankruptcy filing in the midst of a legal separation, there are a number of factors. When husband and wife are legally separated, but not divorced, the ramifications of a bankruptcy filing will depend on:

Ownership of the Business: Do both parties hold ownership?

Debt Owed to the Filing Party by the Business: Does the spouse’s business owe you money?

Bankruptcy Law in Your State of Residence: Do you live in a common law or community property state?

In most states common law property rules apply to property ownership disputes. According to common law, if one individual acquired property during the marriage and puts it in their name alone, that spouse owns the asset. In comparison, if property is acquired and the names of both spouses are listed as joint owners, they have joint ownership of the property. If the husband owns the business alone (and all the shares and assets of the company are in his name alone), the wife probably doesn’t hold any ownership or interest in the business. If he wife in this situation filed for bankruptcy during their legal separation, the business owned in the husband’s name alone would not need to be listed as an asset. The wife’s bankruptcy would not be likely to even have an affect on the husband’s business.

A small number of states are community property states. This means that almost all the property that was acquired by either spouse during the course of the marriage is considered by the court as community property. Community property is jointly owned by both spouses equally no matter which spouse is listed as the owner of the asset in the documentation. If a husband living in a community property state started a company during a marriage, the wife would usually be considered to hold a community property interest in the business even if her name was not listed as an owner in any of the documentation. If the wife were to file for bankruptcy in this situation, the company would need to be listed in the paperwork as an asset. The bankruptcy filer could attempt to exempt their full ownership interest in the company, but it’s possible that the bankruptcy trustee for the Chapter 7 bankruptcy case would attempt to use the ownership interest in the company to pay part or all of the debt owed to creditors.

If you need assistance determining how bankruptcy would affect your spouse or your spouse’s business during a legal separation, please get in touch with one of the experienced southern California bankruptcy attorneys at Westgate Law.

About the Author

Justin Harelik

Justin has a singular goal: to get people out of financial distress and move them to financial stability and prosperity. He does this by combining 15 years of in-depth experience in bankruptcy, credit management, debt negotiation and student loan modifications, and he does it with both English and Spanish-speaking clients.

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