A prenuptial agreement may seem like an ironclad way to protect your premarital assets after your wedding, allowing you and your spouse to predetermine who is responsible for what assets -- and debts. But depending on your state's laws, a prenup may give you little or no protection in the event that your spouse files bankruptcy.
A prenuptial agreement allows a couple planning to wed an opportunity to declare assets and liabilities held by each party individually prior to marriage. Each party lists his assets, and indicates how these assets will be handled during the marriage and in the event of separation or divorce. While prenuptial agreements are often contracted to protect premarital property, they may also include language specifying individual responsibility for debts incurred prior to the marriage.
A Thorny Legal Issue
A prenuptial agreement is intended to stand in a court of law as a couple's declaration of how property and liabilities will be handled during the marriage and in the event of divorce. While the federal Uniform Premarital Agreement Act makes prenuptial agreements legally binding, this legal protection only applies to legal actions between the married couple. Therefore, premarital agreements offer no legal protection from actions taken by creditors during bankruptcy proceedings.
Bankruptcy and Marriage
While it is possible for one spouse in a marriage to file bankruptcy without the other spouse filing as well, there is no guarantee that the spouse who does not file will not be held responsible for repaying the filing spouse's debts, and that includes spouses who had prenuptial agreements that separated their property and/or finances. If the debts leading to the bankruptcy were incurred by one spouse prior to the marriage and are held in that spouse's name only, there may be no legal ramifications for the non-filing spouse. However, if the debts were incurred during marriage, or the spouses live in a community property state, the non-filing spouse may be responsible, regardless.
Community Property States
Married couples living in community property states are left vulnerable to creditors when one spouse files bankruptcy and the other does not, regardless of whether a prenuptial agreement separated the couple's finances. In community property states, any debt incurred during the marriage is considered the property of both spouses, even if it is in the name of one spouse alone. In the event that one spouse files bankruptcy, creditors routinely go after the non-filing spouse for repayment.
States that recognize community property law are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In Alaska, community property laws are optional if the spouses wish all marital property to be considered community property.