Community Property in Bankruptcy

One common concern that persons who are considering filing for bankruptcy have is how the bankruptcy will affect their spouse. Common questions are:

  • Should my spouse file for bankruptcy, too?
  • What will happen to property that is owned in only one spouse’s name?
  • Will my spouse’s property become part of the bankruptcy estate?
  • What will happen to inheritance that one spouse has received?

If you or your spouse is thinking about filing for Chapter 7 or Chapter 13 Bankruptcy, it is important to have an understanding of how community property is treated in a California bankruptcy. An experienced California bankruptcy attorney can advise you on how the California law of community property will affect you and your spouse and whether bankruptcy is a good decision.

What is Community Property?

In some states, California included, property that is acquired during the course of a marriage belongs jointly to both spouses, even if only one spouse is on the title. This property is called “community property,” and it is owned by both spouses as tenants in the entirety. In California, even if only one spouse signed the paperwork for a debt, most debts that arise during the course of the marriage are owed by the community (by both spouses).

Even in a community property state like California, it is still possible for spouses to have separate property. Examples of separate property in California are:

  • Property owned by one spouse prior to the marriage;
  • Inheritances or gifts received by one spouse prior to or during the marriage;
  • Any rents or profits that are derived from separate property remain separate, even if the profits were earned during the course of the marriage; and
  • Anything purchased with money that was separate property remains separate even if the purchase occurs during the course of the marriage.

However, most other property owned by spouses in California is community property.

What happens to Community Property in a Bankruptcy?

Property Exemptions

In a Chapter 7 or Chapter 13 Bankruptcy, community property rules can affect what property is subject to or exempt from the bankruptcy estate. In California, all community property is included in the bankruptcy estate, even if only one spouse files for bankruptcy. However, the separate property of a non-filing spouse does not become part of the bankruptcy estate.

If both spouses decide to file for bankruptcy, California’s “system 1” property exemptions allow each spouse to claim the full amount of many of the exemptions. This is called doubling the exemption, and allows the married couple to exempt more property than a single bankruptcy filer is able to. However, the homestead exemption, one of the largest categories of system 1, is not allowed to be doubled. Spouses are not allowed to double in California’s “system 2.”

In a Chapter 7 Bankruptcy, property exemptions can help protect the property of a bankruptcy filer from liquidation. And because the minimum payment to creditors that is allowed in a Chapter 13 Bankruptcy plan must be at least as much as the creditors would receive in a Chapter 7 Bankruptcy, the exemptions can also affect the amount that spouses must pay in a Chapter 13 payment plan.

Discharge of Debts

Community property is also be important in order to understand what debt has been discharged after the bankruptcy is complete. In California, even if only one spouse declares bankruptcy, all dischargeable claims by creditors against the community property are discharged. This is sometimes called a “phantom discharge” because it can protect the non-filing spouse against claims against the community property, even though that spouse has not gone through the bankruptcy process. This benefit continues as long as both spouses are alive and married.

Contact a Union City Bankruptcy Lawyer Today

If you and/or your spouse are considering filing for bankruptcy, it is important to consult with a California bankruptcy attorney who can advise about how community property law will affect your assets. In some instances, it can be beneficial for both spouses to file for bankruptcy. However, in other situations it will be better for only one spouse to file. Which spouse that is can depend on the assets each spouse brought to the marriage, any inheritances that have been received, and other financial details. Contact an experienced Union City bankruptcy attorney by calling us today at 510-255-4646 or contacting us online.

The Law Offices of Melanie Tavare is a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.