How Is Joint Property Treated in Bankruptcy?

Filing for bankruptcy can put your spouse's share of jointly owned property at risk, whether you file alone or together, depending on the chapter you choose and your state's property laws. In a common-law state, an individual Chapter 7 filing brings only your ownership interest into your bankruptcy estate. In a community property state, it brings in most community property, even if your spouse doesn't file. Chapter 13 usually lets you keep your property whether you file alone or together, as long as you complete your plan. This article explains how each choice affects your spouse, your property, and your debts.

Before you, your spouse, and your attorney decide on the course that will get the best result, and how an individual filing might affect your spouse, you'll want to consider the following:

• Will you file a Chapter 7 liquidation or a Chapter 13 repayment plan?
• Will one of you file alone or will both spouses file together?
• Do you own your property jointly, separately, or by the entirety?
• What state are you in, and can you exempt some or all of your property?
• Are you in a community property state?
• Do any other laws in your state affect marital property?

The table below shows what becomes part of your bankruptcy estate when you file Chapter 7 without your spouse.

Jointly Owned Property in Chapter 7

In Chapter 7, the trustee can sell any nonexempt property, including interest in jointly owned property, whether you file alone or jointly with your spouse. In a common-law state, your bankruptcy estate includes your ownership interest in the property, but not your spouse’s. In a community property state, your estate can include most community property, even if you file alone.

The trustee can take any property that isn't exempt (protected) under your state's laws or the federal exemption laws, if your state allows you to use them. The trustee will sell it and distribute the proceeds to your creditors. You keep your exempt property, which is any property covered by bankruptcy exemptions. (11 U.S.C. § 522(b).)

When One Spouse Files an Individual Chapter 7

When only one spouse files, only that spouse’s debt will be part of the bankruptcy case, but your spouse could still lose property. When you're the debtor spouse, your property becomes a part of the bankruptcy estate, and includes:

• all of your separate property
• in common-law property states, your interest in jointly owned marital property (typically half), and
• in community property states, most of the community property you and your spouse own, even if you file alone. This includes property either of you earns or receives during marriage, but doesn’t include gifts or inheritances to only one spouse or property either spouse owned before the marriage.

Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin (which calls it marital property), and, if the spouses have signed a written agreement to treat their property as community property, Alaska.

In every state, your spouse’s separate property won’t be part of your bankruptcy estate, and neither will your spouse’s share of jointly owned property in a common-law state. (A creditor with a claim against your spouse might still try to collect from that property after your case ends.) Your interest in jointly owned property, and most community property (including your spouse's share), is at risk. If the property isn’t exempt, the trustee can sell it. In a common-law state, the trustee can sell the whole property if certain requirements are met, but your spouse receives their share of the proceeds. (11 U.S.C. § 541(a)(1), (a)(2); 11 U.S.C. § 363(h), (j).)

When Both Spouses File a Joint Chapter 7

If you and your spouse file jointly, your case will include everything you both own. In the states that allow spouses to double exemptions, filing together can help you protect more jointly owned property, especially in community property states. Your case will include

• property that each of you owned separately from before the marriage
• all property acquired during the marriage, whether owned separately or jointly, and
• all community property acquired during the marriage.

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, and some limit which exemptions can be doubled. The federal exemptions allow doubling. Check the rules for the exemptions available to you. (11 U.S.C. § 522(m).)

Jointly Owned Property in Chapter 13

Chapter 13 offers more ways to protect property than Chapter 7 because, instead of selling property, you pay the value of nonexempt property over time through the repayment plan and keep it. The challenging part for many is having enough income to make the required payment, because a significant amount of nonexempt equity, such as in a home, can drive up the monthly payment. If you file without your spouse, Chapter 13 also contains a couple of tools that can keep creditors away from your spouse while you’re paying off your plan.

When One Spouse Files an Individual Chapter 13

When one spouse files Chapter 13 alone, the automatic stay protects only that spouse, but the codebtor stay can shield the nonfiling spouse from collection on joint consumer debts. An individual debtor filing for bankruptcy is protected from collection activity by an injunction called the automatic stay. But the automatic stay extends only to the debtor and the debtor’s property. Typically, nonfiling spouses must deal with creditors. One reason Chapter 13 is more attractive to debtors is that it protects a nonfiling cosigner on consumer debts through the codebtor stay.

The Codebtor Stay

The codebtor stay protects any individual who is liable with the debtor on a consumer debt from collection while the Chapter 13 case is open. It applies to the debts your plan covers. For example, if mom and dad cosigned Ginny’s student loan, when Ginny files Chapter 13, the servicer generally can’t pursue mom and dad as long as the plan provides for the loan. The stay doesn’t cover business debts. It ends if the case is closed, dismissed, or converted to Chapter 7 or 11. A creditor can ask the court to lift it if the codebtor, rather than the debtor, received the benefit of the debt; if the plan doesn’t propose to pay the claim; or if the creditor would be irreparably harmed by the stay continuing. (11 U.S.C. § 1301(a), (c).)

The same applies to married couples. Suppose that Jordan and his wife, Mary Lou, cosigned ten accounts. Jordan alone filed for Chapter 13 bankruptcy and included these accounts in his case. The codebtor stay prevents those creditors from collecting from Mary Lou while Jordan enjoys bankruptcy court protection. If you're considering filing for Chapter 7, you'll want to learn what happens to a codebtor in Chapter 7 bankruptcy.

The “Community Discharge”

The codebtor stay lasts only as long as the debtor’s case is active, but if Jordan lives in a community property state, the “community discharge” might provide Mary Lou with some protection afterward. Here’s how it works.

When Jordan receives his discharge, creditors with community claims on his discharged debts generally can’t collect from community property he and Mary Lou acquire after he files. This protection doesn’t apply to a debt that would be nondischargeable if Mary Lou had filed her own case. The discharge also doesn’t erase Mary Lou’s personal liability, so creditors can still pursue her separate property. (11 U.S.C. § 524(a)(3).)

When Both Spouses File a Joint Chapter 13

In a joint Chapter 13, you keep all of your property, whether it’s exempt or not, as long as you complete your plan. You must make monthly payments that pay your unsecured creditors at least what they would have received if your nonexempt property had been sold in a Chapter 7 case. A plan lasts three to five years, depending on your income and how much you must repay. After you complete your payments, you’ll receive your discharge. (11 U.S.C. § 1325(a)(4); 11 U.S.C. § 1322(d); 11 U.S.C. § 1328(a).)

Tenancy by the Entirety

If your state recognizes tenancy by the entirety and you and your spouse own your home this way, filing alone may protect your home in bankruptcy.

Property owned as tenants by the entirety belongs to the marriage, not to either spouse, and in states that recognize this form of ownership, it generally can’t be reached by creditors of only one spouse. If you file alone, you can usually exempt your interest in property held as tenants by the entirety from creditors owed only by you, to the extent state law protects it from them. Creditors holding debts you owe jointly with your spouse can still reach it, whether you file alone or together. Find out whether this protection applies before you decide how to file. (11 U.S.C. § 522(b)(3)(B).)

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. In some situations, though, filing alone will still be the right call.

Next Steps for Your Bankruptcy Case

If you have any questions or want to review your options, consult with an experienced bankruptcy attorney. In the meantime, you might want to learn more about

• the Chapter 13 repayment plan
• the marital adjustment deduction in Chapter 13, and
• check your state's exemptions before you decide how to file.

Bankruptcy is essentially a qualification process in which the laws provide instructions for completing a lengthy set of bankruptcy forms. You must complete all forms in Chapters 7 and 13, even if you have nothing to report, and you can find the forms on the U.S. Courts bankruptcy form webpage. The bankruptcy document checklist will help you gather what you need to complete the forms and is a great resource for determining what to bring to your meeting with your bankruptcy lawyer.