Bankruptcy & Community Property

by Mark Vansetti
Community property may be sold in a Chapter 7 bankruptcy proceeding.

Community property may be sold in a Chapter 7 bankruptcy proceeding.

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In a Chapter 7 bankruptcy, the trustee, the person appointed by the court to represent creditors and administer the bankruptcy estate, sells off all eligible assets to pay your debts. Chapter 7 is used to discharge, or permanently excuse, most debts. If you are married and reside in a community property state, both separate property and community property may be sold through bankruptcy.

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Separate Vs. Community Property

Separate property is any property obtained by one party before marriage. It also includes gifts and inheritances received by one spouse during the marriage. Separate debts are those accumulated by a spouse before the marriage. Community property is all other property acquired during the marriage and community debt is debt accumulated during the marriage. Community property and community debt is handled differently in the nine community property states of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. The remaining states are non-community property states, or common law states.

Filing Alone

Even if only one spouse files for bankruptcy, all community property and community debt of the marriage is considered part of the bankruptcy estate in a community property state. As a result, the filing spouse's bankruptcy estate consists of both community property and his separate property, with the exception of assets exempted under federal or state law. The non-filing spouse's separate property is not included. Property of the bankruptcy estate is then taken by the trustee and sold to pay the filing spouse's debts.

Filing Together

If spouses file for bankruptcy together, or jointly, not only is all of their community property included in the bankruptcy estate, each spouse's separate property is included as well. Additionally, both spouse's separate debts are also included in the bankruptcy, alongside the community debts. This is the case in both community property states and non-community property states. There are times, however, when one spouse should file separately instead of jointly. For example, if all the debt was accumulated by one spouse before the marriage, there would be no reason for spouses to file for bankruptcy jointly.

Chapter 13 Protection

If a spouse files Chapter 7 bankruptcy alone, a creditor may still try to collect the debt from the other spouse if her name is also on the debt. This means that if the spouses both signed for the same debt, the creditor may attempt to collect from the non-filing spouse. Chapter 13 bankruptcy provides a protection for this situation. When one spouse files Chapter 13 bankruptcy, an automatic stay protects both the filing spouse and any others who may be liable for the debt, commonly referred to as co-debtors. Chapter 13 differs from Chapter 7 in that all debts are not discharged. Instead, the person filing for Chapter 13 works out a repayment plan to pay back some or all of the debts over time, so no assets are liquidated as is the case with Chapter 7.