How Is Joint Property Treated in Bankruptcy?

How will your bankruptcy filing affect your spouse and the property you own together and separately? Questions like this one often require careful consideration of many factors before a bankruptcy attorney can advise you accurately. Before you, your spouse, and your attorney decide on your best course, the one that will maximize your outcome, you must take into account the following:

• What type of case will you file – Chapter 7 straight bankruptcy or Chapter 13 repayment plan?
• Will one of you file alone or will both spouses file together?
• How do you own your property – jointly, separately, by the entireties?
• 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?

Continue on to learn more about how the answers to these questions could apply in any particular case.

Jointly Owned Property in Chapter 7

When you file bankruptcy under Chapter 7, you have the option of filing jointly with your spouse. Or, you can file alone. Your bankruptcy estate will include your ownership interest in the property, but not your spouse's ownership interest.

When Both Spouses File a Joint Chapter 7

If you and your spouse file jointly, 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.

When you file under Chapter 7, the bankruptcy trustee can take any of your property that is not exempt (protected) under the laws of your state (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 get to keep your exempt property. (To learn more about exemptions, and find links to each state's exemption list, see Bankruptcy Exemptions: An Overview.)

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 on the bottom of our main exemption page to find out how it handles doubling.)

When One Spouse Files an Individual Chapter 7

When only one spouse files for bankruptcy, only that spouse's property and debt will be part of the bankruptcy case. When you are the debtor spouse, your property becomes a part of the bankruptcy estate, and includes:

• all of your separate property
• in common law property states, only half of your jointly owned marital property
• in community property states, all of the community property you and your spouse own, 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 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, and, if the spouses have signed a written agreement to treat their property as community property, Alaska),

These rules mean that your spouse could lose property as a result of your solo bankruptcy filing. In every state, your spouse's separate property (and your spouse's half of the marital property, in non-community property 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.

Jointly Owned Property in Chapter 13

Chapter 13 offers you a greater chance of protecting property. When you file Chapter 13, you have a greater chance of protecting property. even when some of your property is nonexempt. If you file without your spouse, Chapter 13 contains a couple of tools that will keep creditors away from your spouse's interest in the property while you're paying off your plan.

When Both Spouses File a Joint Chapter 13

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 that will pay back to your unsecured creditors at least the value of your nonexempt property. 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'll receive your bankruptcy discharge.

Learn more about the Chapter 13 repayment plan.

When One Spouse Files an Individual Chapter 13

Normally, the debtor filing bankruptcy as an individual 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 debts. Ordinarily, the non-filing spouses of debtors must fend off their creditors on their own. But to make Chapter 13 more attractive for more debtors, the bankruptcy code also protects a non-filing cosigner through the co-debtor stay.

The co-debtor stay

If one of the spouses files under Chapter 13, both of them will discover a nifty perk called the co-debtor stay. The co-debtor stay protects from collection activity any co-debtor on any account included in the Chapter 13 debtor's reorganization plan, For example, if mom and dad co-signed Ginny's student loan, when Ginny files Chapter 13, mom and dad needn't worry about the servicer as long as Ginny makes her Chapter 13 payments.

The same is true for married couples. Suppose that Jordan and his wife, Mary Lou, co-signed ten accounts. Jordan alone filed for Chapter 13 bankruptcy and included these accounts in his case. The co-debtor stay applies to prevent those creditors while the Chapter 13 debtor (Jordan) enjoys the protection of the bankruptcy court.

The "community discharge"

The co-debtor stay lasts only as long as the debtor's case is active. But, if Jordan lives in a community property state, the so-called "community discharge" might provide Jordan's spouse Mary Lou with some protection.

Here's how it works: When Jordan receives his discharge, the creditors on his discharged debts are prohibited from attempting to collect from him or from his property, including any community property. Therefore, all the community property Jordan and Mary Lou own will be safe. But, any separate property Mary Lou owns will be fair game for creditors.

Tenancy by the entirety

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, in some situations 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.

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.