Separate Property Rights and Bankruptcy

If you are married, there are specific rules in place in your state that indicate how property is to be treated. Some states use a standard called "community property", in which almost all assets acquired during the marriage are considered to belong to both spouses. Other states use different requirements in the determination of what is and is not considered the property of both parties. Regardless of the actual specifics of what your state calls marital property, it is important to understand what happens when you own property separately from your spouse and are considering bankruptcy.

Separate Property and Bankruptcy

When two people are married, often it makes sense for them to file bankruptcy together. This would allow for the spouses to resolve all marital debt that they owe together and would give both of them and the marital unit a clean slate financially. However, this is not always done, and sometimes it isn't the right choice. If one spouse owns the bulk of the property, if one spouse owes a lot of debt and the other does not, or if one spouse is eligible to file bankruptcy and the other is not, then filing bankruptcy independently might be the right choice.

Typically, when one spouse files bankruptcy without the other, the separate property of the other spouse remains unaffected and not attachable by bankruptcy proceedings. However, there are usually some pretty specific requirements for what can actually be considered separate property and property that cannot be attained by bankruptcy creditors. While the specifics of this differ depending on where you live, what the rules are and whether you reside in a community property state or not, in general, separate property is going to be anything that has really belonged only to one spouse and is shared between them or bought by both of them.

For instance, separate property in bankruptcy might include the following:

1. Assets that were owned prior to the marriage and that haven't been intermingled with any assets purchased after marriage of purchased together.
2. Assets given as a gift or that were inherited by one spouse during the course of the marriage that have not ever been mixed with shared household accounts.
3. Money awarded for non-economic damages in a personal injury lawsuit. Compensation for lost wages is generally considered to be community property because a spouse's income is community property.
4. Anything obtained as an exchange for one of the above kinds of property.

When property is separate, it needs to be clearly and absolutely defined and treated as such. This is true for things like checking accounts as well. If one party has put marital money or funds earned during the marriage into a checking account, it is possible that the account will be considered the property of the marital unit (this is pretty much always going to be true in a community property state). On the other hand, if one party had a separate checking account before marriage and never put in any money that belongs to the marital unit, that account can remain separate property. You will need records either way the activity of the checking account over the years in order to prove whether it is community or separate property.

If the bankruptcy court believes that you are incorrectly trying to classify marital or community property as separate for purposes of keeping it out of the hands of the creditors, the bankruptcy case can be dismissed and you can be stopped from filing bankruptcy for a period of time afterwards.

What About Debt?

There are also specific rules associated with marital debt. Typically, the party who has his or her name on the debt is responsible for paying the debt. This means that if one person takes a credit card, the other spouse is not considered automatically responsible just by virtue of the fact that the two are married. However, if the two spouses take on the credit card debt together, then both are going to be responsible for it if it is in both of their names, regardless of who actually spent the money.  If both of the spouses' names are on the card, and if one party declares bankruptcy while the other doesn't, the creditor in many cases can technically go after the non-bankrupt spouse for the full amount of the debt owed. Understanding how this works becomes very important in understanding exactly what bankruptcy protection can do for you.

Getting Legal Help

When you are declaring bankruptcy and seeking protection, you should consider getting the help of a bankruptcy attorney. He or she can explain to you what is likely to constitute separate property and can help you to decide if joint bankruptcy or individual bankruptcy makes the most sense given the structure and amount of your debt and assets.