If you own joint property, filing for bankruptcy can affect your co-owners. How your individual bankruptcy will affect your jointly owned property depends on:
- the property laws of your state
- who the co-owners are
- whether the property is exempt, and
- whether you file for Chapter 7 or Chapter 13 bankruptcy.
To learn more about what happens to your property in bankruptcy, visit our Property and Exemptions in Bankruptcy topic area.
Property of the Bankruptcy Estate
When you file for bankruptcy, almost all of your assets become property of the bankruptcy estate. In Chapter 7 bankruptcy, the bankruptcy trustee has the power to sell your nonexempt property to pay back your creditors. In Chapter 13 bankruptcy, the value of any nonexempt assets must be paid to your unsecured creditors in your repayment plan.
Exemptions Protect Your Property in Bankruptcy
Bankruptcy exemptions protect a certain amount of property in Chapter 7 bankruptcy and reduce the amount you have to pay back unsecured creditors in Chapter 13 bankruptcy. If you can exempt an asset, you can keep it. As a result, if your jointly owned property has no equity or is fully exempt, it will not be affected by your bankruptcy.
To learn more, see our Bankruptcy Exemptions topic.
How Is Joint Property Treated in an Individual Bankruptcy?
Whether your jointly owned property will be considered property of the bankruptcy estate depends on where you live and who the joint owner is.
Common Law Property States
In common law property states, each co-owner’s individual interest in joint property is typically treated as his or her separate property. This means that only your portion of the joint asset will become part of your bankruptcy estate. The trustee can’t take the co-owner’s share to satisfy your creditors.
However, even if your co-owner’s share is not part of the bankruptcy estate, a Chapter 7 trustee may be able to sell the entire property if your portion is not exempt. If the trustee is unable to sell only your share (meaning the property can’t be divided), he or she must prove that the benefit of selling the property as a whole outweighs any detriment to the joint owners. If the court allows the sale of the entire property, the trustee must pay the co-owners their share from the proceeds.
Community Property States
Certain states (called community property states) treat property acquired by either spouse during the marriage as equally owned in its entirety by both spouses. In these states, almost all assets acquired during the marriage are considered community property. This holds true even if the other spouse is not on title to the property.
Even if you are filing an individual bankruptcy, all community property becomes property of the bankruptcy estate because each spouse is deemed to own the asset in its entirety. This means that unless you can exempt the entire community asset, it can be taken and sold in Chapter 7 bankruptcy. If you live in a community property state and can’t exempt all community property, it may be in your best interest to file jointly with your spouse because some states allow married couples to double their exemptions if they file jointly.