What Is Community Debt?
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Community debt is any debt that you or your spouse incur while married or any debt for which you and your spouse are co-signers. There are 10 community property states where spouses or legal partners may have community debt. This article outlines the 10 community property states and how having community debt may affect your bankruptcy filing.
Written by Kristin Turner, Harvard Law Grad.
Updated July 2, 2022
Community debt is the term used to describe the way certain debts are treated in a community property state. This is important information for people facing debt collection or considering bankruptcy in a community property state. Those states are:
Alaska is not a community property state, but it allows married couples to agree to treat their property and debts as community assets and liabilities. Under state law, married couples in Alaska can also keep separate debts and assets.
What Debt Is Considered Community Debt?
In most states, usually, only the spouse who takes on debt is responsible for it. If the debt is joint, both spouses are responsible. And, in some situations, both spouses are responsible for debt that benefits both parties or is used to pay for necessities. Otherwise, the spouse who takes out a loan is responsible for repaying the loan.
In a community property state, most debt that you or your spouse take on during the marriage is community debt. That’s true even if your spouse isn’t involved in the application process and doesn’t receive the benefit of the loan. For example, if one spouse purchased a car, it would be considered marital property, even if the other spouse didn’t drive it or use funds from their bank account to pay for it.
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Common Law States vs. Community Property States
The way property and debt are treated in a given state depend on whether it’s a common law state or a community property state.
Common Law States
In common law states, individual debt generally remains individual debt. So, if one spouse opens a credit card account in their name alone and runs up $5,000 in credit card debt, they are solely responsible for paying the debt. (Note that this debt may be treated differently in divorce proceedings.)
If the credit card company sues to collect the debt, it can’t take property belonging solely to the other spouse. The creditor is also limited to the debtor spouse’s share of jointly held marital property. Many states even allow married couples a special way of titling some joint marital property that completely protects it from the creditors of one spouse.
Community Property States
In a community property state, individual debt that one spouse incurs during the marriage is generally considered community debt. The other spouse’s separate property is generally still protected from creditors. But anything considered community property is usually fair game for creditors and debt collectors.
For many couples, this means more property is at risk if a creditor or debt collector sues to collect a debt incurred by one spouse.
Community Debt in Bankruptcy
If you’re married and considering bankruptcy, make sure you know whether you’re in a common law or community property state. In a state with community property laws, you’ll be required to list all community property, even if only you or your spouse files a bankruptcy case. But there is an upside.
If one spouse files bankruptcy and discharges community debt, the “community” is no longer legally responsible for that debt. That means all community property is off-limits to debt collectors even though only one spouse filed for bankruptcy and received a discharge.
Of course, there are many factors to consider. If you’re deciding whether to file bankruptcy alone or with your spouse, you’ll also want to think about:
How much individual debt you each have
How much of your debt is community debt
How much separate property you each have and whether any of it is nonexempt
Whether either person has credit accounts in good standing that you want to keep
Whether there is benefit in either of you maintaining good credit
It’s also worth noting that when only one spouse files, it may leave the door open for the other spouse to file and discharge community debt sooner than would otherwise be possible.
There’s no one factor that determines the best approach for you. It’s important to educate yourself before making a decision. If you’ve read Upsolve’s resources and are still unsure about the best approach for you and your spouse, you may want to schedule a free consultation with a bankruptcy attorney for legal advice.
In a community property state, most debts incurred during a marriage are considered community debts. That means property jointly owned by the spouses may be at risk from debt collectors. And most property acquired during the marriage is considered community property, even if only one spouse purchased it or only one spouse’s name is on the title.
If you’re receiving collection notices, have been sued on a debt, or are considering bankruptcy in a community property state, be sure you understand what property may be at risk.