Expert: Los Angeles Bankruptcy Lawyer Leon D. Bayer - 9/6/2009

Question
QUESTION: My husband filed a chapter 13 in January. As we live in California, our attorney advised us that I was not allowed to pay my own debts and that they must be included in the bankruptcy due to community property laws. I have informed all of my creditors of this repeatedly. Only now, after 8 months have they stopped calling me. However, I pulled my credit report and saw that all of my creditors are listing my debts as "Charged off/Bad debt." When I pulled my husbands credit, his creditors list his debts as "Unrated" and reference his chapter 13 payment plan. His credit score is almost 100 points higher than mine. I tried to dispute it directly through the credit bureau who said they verified all the information and will not change it.

Is that correct? Can they report me as charged off even though my debts are being handled through my husbands bankruptcy? Why would I, a non-filing spouse, be punished more than the one who actually filed the bankruptcy? Would this be a violation of the automatic stay?

ANSWER: I am sorry that you are dealing with such a frustrating situation. Unfortunately, the credit report sounds like it is accurate and correct because it is reporting true facts.

As soon as you stop paying your debts, it is predictable that your credit score will plunge. What I do not understand is why in the world your debts are included in the bankruptcy, but you did not file? If you can shed some light on that it might help me to give you some guidance.

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QUESTION: I worked in finance and was concerned about having the bankruptcy on my credit report. Our attorney advised us that I did not have to file, but because we lived in California which is a community property state my debts were included with my husband's whether or not I filed. In fact, he specifically told me not to pay on my debts once we decided to move forward with the bankruptcy and that they would be discharged with my husbands. He called it a "Phantom discharge." I would have paid on my debts the whole time, but I was told in no uncertain terms that I could not pay on them. That all secured debts had to be treated the same. And that community property meant that my husband and I share all property, income and debt, so my debts are his debts and go with the bankruptcy.

Was I completely mislead? What can I do now? We are stuck in this chapter 13 with no money for me to pay on my debts each month. And if in fact the debts are not going to be discharged, then I am in a worse place because I have these charge offs and cannot even pay on them.

Answer
I don't like to second guess a fellow attorney unless I have reviewed the complete file and have a personal consultation with the client. However, in this case I think I will "second guess."

There are ribbons of truth in what your lawyer has told you about the "phantom discharge" and the relationship between community property and community debt. So far, so good. However the "phantom discharge" is very limited in scope, (see Bankruptcy Code §524(a)(3), and it protects the community property interests of a non filing spouse in marital property after the filing spouse receives a discharge. However, this limited protection exists only so long as you remain married and living together. Further drawbacks are that after the filing spouse receives a discharge, creditors still have the right to collect from the non filing spouse, (collection letters, collection calls, and even including suing you plus keeping your credit in a state of ruin for a long time - but with the limitation that they can not execute a court judgement to collect the debts out of community property assets. They can execute a judgement against any separate property asset that belongs to you.

You were concerned about having a bankruptcy on your credit report. So instead, you don't have bankruptcy on your report, but your credit is ruined anyway. I think it added up to the same thing, bankruptcy or no bankruptcy. If I had been your lawyer, I would have strongly encouraged both of you to file together. If an employer cares about hiring only someone with good credit, you still missed the boat, even though you did not file bankruptcy.

You might consider filing your own 13 at this point so that you will have full protection, and there is even a procedure to have your case jointly administered with your husband's case.

One more question: Why was a 13 filed instead of a 7? It might even be possible for you to file a 7 at this time, while your husband stays in Chapter 13. However, before you do any such filing, 13 or 7, you need the advice and representation of a really super duper BK specialist to find out what your options are. Sadly, I suspect very few lawyers who practice consumer bankruptcy will have the expertise and knowledge to understand joint administration or to set you on the best path.

Anyone who wants to do some further general reading on bankruptcy can read my Bankruptcy Guide at http://www.debt-relief-bankruptcy.com/guide-new.asp