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.
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.
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.