Bankruptcy Laws Concerning Real Property Owned by Two Separate People in Texas

By Mary Jane Freeman

If you're considering bankruptcy, you may be wondering how the filing will affect a co-owner and the property you own together. Although you will be filing in Texas, federal law governs much of the bankruptcy process. Therefore, the extent to which your spouse or any other co-owners are at risk depends in large part on the type of bankruptcy you file, the ownership arrangement you have with the co-owner, and when the property was acquired.

Chapter 7 Vs. Chapter 13

Although you will be filing for bankruptcy in Texas, your bankruptcy case will be handled according to federal law. This is because the U.S. Bankruptcy Code governs all bankruptcy cases. Debtors typically file for either Chapter 7 or Chapter 13 bankruptcy. With Chapter 7, debtors give up all of their nonexempt assets to a bankruptcy trustee who liquidates them to pay creditors. With Chapter 13, no assets are given up; however, the debtor enters into a repayment plan that lasts three to five years. With both Chapter 7 and 13, any remaining unpaid debts are discharged and the debtor's liability is extinguished.

Community Property

Texas is a community property state. This means any property or debt acquired by either spouse during the marriage is presumed to be the joint property of both spouses, commonly referred to as "community property." This includes real estate, such as homes and land. When you file for bankruptcy, you must list all property you own or have an interest in, including community property, which immediately affects your spouse. While your liability is discharged by the bankruptcy, your spouse's is not. As a result, creditors may attempt to collect from your spouse for any jointly owned debts, since they will be barred from coming after you.

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Sale of Property

In addition to holding property jointly with another person, you may also own property as tenants in common, or TIC. This is a common practice among non-spouses. With a TIC, persons own property together in equal or unequal shares, with each enjoying a right to use and possess the entire property regardless of ownership share. Owners also have the right to sell their interest in a TIC to a third party or give it away in a will. If you file for Chapter 7, the bankruptcy trustee has the right to seize any property you own to pay off your debts, including property owned as a TIC or joint tenancy. If the creditor seizes and sells the property, however, the other owner will receive a proportional share of the sale -- his share will not be used to pay your debts.

Partition

Although a bankruptcy trustee has the right to sell your TIC or joint tenancy property, he will first attempt to settle your debts using other methods. First, he will evaluate whether partition is possible. This is the act of separating your interest from that of the other owners. If separation is possible, only your share of the property will be sold. However, if separation is not possible, the bankruptcy trustee will ask the court's permission to sell the entire property. The bankruptcy court will only grant this request if the detriment to the co-owners is outweighed by the benefit to the bankruptcy estate.

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Tenancy in Common Property & Bankruptcy in Illinois

References

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