What Can I Keep if My Husband Files Bankruptcy but I Don't?

By Mary Jane Freeman

Sometimes, married couples face financial obstacles that feel impossible to overcome, inhibiting their ability to provide for their families or plan for the future. When this happens, spouses may explore bankruptcy as a way out of the financial abyss and pathway to a fresh start. However, if your spouse filed for bankruptcy and you didn't, you may be wondering if you're at risk for losing any property. The answer is maybe, depending on where you live and what type of property was included in the bankruptcy.

Sometimes, married couples face financial obstacles that feel impossible to overcome, inhibiting their ability to provide for their families or plan for the future. When this happens, spouses may explore bankruptcy as a way out of the financial abyss and pathway to a fresh start. However, if your spouse filed for bankruptcy and you didn't, you may be wondering if you're at risk for losing any property. The answer is maybe, depending on where you live and what type of property was included in the bankruptcy.

Character of Property

In both community property and common law states, property acquired during a marriage is considered the marital property of both spouses. Property owned before the marriage, purchased with separate property, or received by inheritance or gift is considered the separate property of the spouse who acquired it. In common law states, property acquired during the marriage, but only titled in one spouse's name is also considered separate property. In community property states, both spouses are equally responsible for debts acquired during the marriage, known as community debt, regardless of which spouse incurred the debt. In contrast, spouses in common law states are only responsible for debts titled in their name, individually or together with their spouse.

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Chapter 7 Vs. Chapter 13

There are two common forms of personal bankruptcy: Chapter 7 and Chapter 13. In Chapter 7 bankruptcy, a bankruptcy trustee collects all of a debtor's nonexempt assets, if any, and liquidates them to pay the debtor's creditors. Any remaining unpaid debts are discharged and the debtor is no longer liable for them. In a Chapter 13 bankruptcy, the debtor is not required to give up any property. Instead, he enters into a repayment plan lasting three to five years. If any debts remain unpaid at the conclusion of the repayment period, they are discharged and the debtor is no longer liable for them.

Bankruptcy Estate

When a debtor files for bankruptcy, a bankruptcy estate is created. Any property the debtor owns or has in interest in is placed in this estate. In both community property and common law states, this includes a debtor's separate property and the couple's marital or jointly held property, such as the marital home, cars and even household items like the TV. None of a nonfiling spouse's separate property is included in the bankruptcy estate. In a Chapter 7 bankruptcy, the trustee will seize assets in the bankruptcy estate to pay the debtor's creditors. If a nonfiling spouse wants to keep a joint asset, she will need to either pay for it or find an exemption to protect it. If a married couple lives in an common law state, the nonfiling spouse may be reimbursed for her one-half interest in any marital property that is liquidated. The good news is that a nonfiling spouse doesn't have to worry about such issues in a Chapter 13 bankruptcy, since assets are not seized.

Exemptions

Debtors seeking to protect property in bankruptcy, especially marital or jointly-held property, can do so by using an exemption. Exemptions are available in both federal and state law and may be applied to certain categories of property, protecting them from seizure under Chapter 7 or incorporation into a repayment plan under Chapter 13. For example, a Kentucky debtor could protect his home up to $21,625 in value under the federal exemptions or up to $5,000 in value under the state's exemptions. While some states allow debtors to choose between federal and state exemptions, others require debtors to use state exemptions only.

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California Laws on Community Property in a Bankruptcy

References

Related articles

What Is Considered Exempt in Chapter 7 Bankruptcy Law?

When you file for Chapter 7 bankruptcy, any assets you have may be seized to pay your obligations. However, pursuant to the U.S. Bankruptcy Code, certain property may be protected from loss, or exempted. Property commonly exempted includes a debtor's home, vehicle and personal belongings. However, there are limits to what can be protected and in what amounts. To find out what you can protect in bankruptcy, you must look to both federal and state law.

Bankruptcy & Community Property

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.

When Will Chapter 7 Exempt the Homestead?

Chapter 7 bankruptcy allows a debtor to wipe out many of his debts by erasing, or discharging, his obligations to pay creditors. As part of the bankruptcy case, the debtor's nonexempt assets are sold to pay his debts, but many debtors are able to qualify for exemptions to save some of their assets. Homestead exemptions vary by state. Some states allow debtors to use either federal or state exemptions, while others only allow a debtor to use that state's list of exemptions.

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