Community Property And Bankruptcy

December 4th, 2009 by Reed Allmand

The state of Texas is a “community property” state which means that property in which both spouses own shares and property acquired during the marriage is considered “community property.” Community property only exists within marriage. What does this mean for a spouse considering bankruptcy?

Married couples where one or both spouses are considering bankruptcy must carefully weigh whether they should file jointly, separately or if only one spouse should file bankruptcy. The amount of community property involved will weigh heavily in which choice is appropriate.  Also how that property is being held will factor in the final decision.

Choices and Consequences

If only one spouse files bankruptcy, the non-filing spouse could become vulnerable to facing collection actions on his/her share of the debts.  For example, if the married couple incurred $20,000 of debt during their marriage and before bankruptcy and only one spouse received a bankruptcy discharge, the non-filing spouse might be liable for half of that amount ($10,000).  However, if all of the debt was incurred by the filing spouse before the marriage, the non-filings spouse might not be held liable.  If this is the case, you need to work carefully with a bankruptcy attorney to define and prove who is and who is not liable for the debts.

If only one spouse files bankruptcy, 50% of the community property held by the couple and all of the filing spouse’s property owned before marriage may become part of the bankruptcy estate, if it is not exempt. For example, if a couple has a joint cash account with $50,000 in it, the bankruptcy court may seize 50% of that cash to satisfy debts during bankruptcy, if the money is not deemed exempt.  It is very important to work closely with your bankruptcy attorney to maximize all bankruptcy exemptions available.