How Is Joint Property Treated in Bankruptcy?
Find out how filing for bankruptcy under Chapter 7 or Chapter 13 will affect property you own with your spouse.
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If you are married and considering bankruptcy, you should consider how your bankruptcy filing will affect your spouse and the property you own together. The answers depend on what type of case you file, whether you file alone or with your spouse, how you own your property, and the laws of your state about marital property.
When you file for bankruptcy, either alone or with your spouse, you may file under Chapter 7 or Chapter 13 of the Bankruptcy Code. If you file under Chapter 7, the bankruptcy trustee may take any of your property that is not exempt under the laws of your state (or the federal exemption laws, if your state allows you to use them). If you have valuable nonexempt property, the trustee will likely take it, sell it, and distribute the proceeds to your creditors. You get to keep your exempt property. (To learn more about exemptions, and find links to each state's exemption list, see Bankruptcy Exemptions - What Do I Keep When I File for Bankruptcy?)
Once the trustee has dealt with any nonexempt property you own, all dischargeable debts will be wiped out. (Some debts cannot be wiped out in bankruptcy, including back taxes, child support, and most student loans.) The whole process takes four to six months.
Under Chapter 13, you get to keep all of your property, whether it's exempt or not. However, you must make monthly payments under a repayment plan to pay back some or all of your debts. A Chapter 13 repayment plan lasts from three to five years, depending on how much you have to pay back and how high your income is. Once you've completed your payments, you will receive your bankruptcy discharge.
How Filing Jointly for Bankruptcy Affects a Spouse
Whether you file for bankruptcy under Chapter 7 or Chapter 13, you have the option of filing alone or filing jointly with your spouse. If you file jointly, all property both of you own, whether you own it separately or together, will be part of your bankruptcy case. So will all of your debts, which means your discharge will apply to both of you; in other words, neither of you will still be liable for discharged debts.
Some states allow married couples who file jointly to "double" their exemptions. For example, if an individual can exempt up to $30,000 of home equity, a married couple filing together could exempt $60,000. Not all states allow doubling, however, and those that do sometimes allow only certain exemptions to be doubled. (Select your state that the bottom of our main exemption page to find out how it handles doubling.)
If you own most of your property -- and owe most of your debt -- with your spouse, filing jointly often makes sense, especially if your state allows doubling. However, there are situations when filing alone will still be the right call. For example, if your state recognizes a form of property ownership known as "tenancy by the entirety," and you and your spouse own your home in this way, filing alone may keep your home out of your bankruptcy case altogether. Property owned as tenants by the entirety belongs to the marriage, not to either spouse, and it can't be taken or sold to pay debts owed by only one spouse. If you file separately, your tenancy by the entirety property won't be part of your bankruptcy estate at all: You can keep it, whether or not it would otherwise be exempt. This is a huge potential benefit, and you should find out whether you can take advantage of it before you decide how to file.
How Filing Separately Affects a Spouse's Property
When only one spouse files for bankruptcy, only that spouse's property and debt will be part of the bankruptcy case. The spouse's property includes all of his or her separate property. In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin, and, if the spouses have signed a written agreement to treat their property as community property, Alaska), all of the community property you and your spouse own is also part of your bankruptcy case, even if you file alone. This includes all property either of you earns or receives during marriage, but doesn't include gifts or inheritances to onlyone spouse or property one spouse owned before the marriage. In common law property states, only half of your jointly owned marital property will be part of your bankruptcy estate.
These rules mean that your spouse could lose property as a result of your bankruptcy filing. In every state, your spouse's separate property (and your spouse's half of the marital property, in common law states) won't be part of your bankruptcy estate, and can't be taken by the trustee in a Chapter 7 case. However, all of your community property or half of your marital property will be at risk. If it isn't exempt, the trustee could take it and sell it in your Chapter 7 case.
How Filing Separately Affects a Spouse's Debts
If your spouse owes separate debts (such as a student loan or medical bills from before you met), they won't be affected by your separate bankruptcy filing. Your spouse will continue to owe that debt, which won't be discharged when your case is over.
If you owe debts together, however, your bankruptcy could leave your spouse on the hook alone for the entire amount you owe. Your Chapter 7 bankruptcy wipes out your liability for dischargeable debt, but it won't affect your spouse's liability. (The same is true for any other codebtors; for example, if your parents cosigned your car loan, they will still be liable to repay it even after your liability is wiped out in bankruptcy.) You could conceivably exit your Chapter 7 bankruptcy debt-free -- and headed for divorce court.
This is why many people choose Chapter 13: As long as you the debt is included in your plan and you make your plan payments, your spouse or other codebtor will be protected from collection actions while your bankruptcy proceeds. If you repay the debt in full through your plan, your spouse or other codebtor will no longer be liable once your bankruptcy ends.
Speak with an Attorney
As you can see, whether to file jointly or separately for bankruptcy is an important choice, and one that may have major repercussions. The decision depends on state law, your financial situation, and other factors. If you have any questions or want to review your options, you should consult with an experienced bankruptcy attorney.