Jointly held assets can be subjected to bankruptcy in community property areas
One of the most important decisions facing a married person contemplating bankruptcy is whether to include a spouse in the court action. In community property states, that decision becomes more complicated.
There are benefits and drawbacks when a couple's property is held jointly under community property laws. Only nine states and one United States territory - Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin and Puerto Rico - are community property jurisdictions.
Other than gifts or inheritances, community property includes the assets earned or received during a marriage and split equally between the two spouses. Separate property owned by each spouse before the union isn't counted as part of the marriage estate.
As a result, when a married person files bankruptcy alone within such a jurisdiction, the debts are first paid by the pre-marriage property owned by that individual. However, if the separately held property doesn't cover the debts - and it often doesn't - the non-exempt community property owned by both spouses will be used to pay off bills.
The court has the right to draw from the jointly owned assets because it is automatically considered part of the bankruptcy estate, regardless of whether both spouses join in the filing.
In many cases, legal experts agree that filing as a couple when living in a community property state is the best way to proceed. While state laws may differ, every jurisdiction has some laws that address the equal contribution of both partners during the marriage.
Even in cases in which one spouse files, the non-filing partner will reap some protection after a discharge of debts occurs. The bankruptcy protects any property that the debtor owns, including jointly held assets acquired by the couple after bankruptcy.
Upon discharge of one spouse, the court's decision protects any assets that the debtor owns, including community property acquired by the couple after bankruptcy.
However, California bankruptcy attorney Cathy Moran writes on Bankruptcy Law Network that protection from a community property discharge given to a non-filing spouse only continues as long as the couple stays married.
"Death or divorce will again expose the non-filing spouse to collection action on the debt discharged as to the other spouse," she states. In the case of a legally separated couple that lives in a community property state and has divided their assets before the bankruptcy filing. It is generally best for one spouse to file under such circumstances.
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