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.

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.

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.

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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

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You can file for bankruptcy with your spouse after you have filed for divorce as long as the divorce has not become final. If the divorce court has entered a final judgment dissolving the marriage, you are no longer married and cannot file for bankruptcy as husband and wife--even if your debts were incurred while you were married. Filing prior to the divorce becoming final can help if financial problems are preventing you from working out a realistic divorce settlement.

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If you are married but have unmanageable debts, you can file for bankruptcy protection as a couple or as an individual. To qualify for a Chapter 7 bankruptcy, you must list income and assets of the entire household; if you don't meet the legal guidelines, you may be able to file for a Chapter 13 repayment plan. In both cases, property included in the bankruptcy may be separate from property of the non-bankrupt spouse. One crucial consideration in a separate filing is whether you live in a state that recognizes community property or common-law property. You may want the help of an attorney or legal document service, given the complexity of not just the bankruptcy filing, but also the difficulty of classifying property.

How Does Bankruptcy Affect Spouses?

Bankruptcy may be your path away from overwhelming debt and can give you a fresh start. If you are married, your spouse does not have to file with you; but filing alone doesn’t mean that your spouse won’t be affected by the bankruptcy. Under Chapter 7 bankruptcy, depending on your state of residence, assets held in your spouse’s name may be sold to satisfy creditors, and your spouse's credit score could be negatively impacted.

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