What Happens to Jointly Owned Property in an Individual Bankruptcy?

If you own joint property, filing for bankruptcy can affect your co-owner(s). How your individual bankruptcy will affect your jointly owned property depends on:

• the property laws of your state
• your relationship to the co-owner(s)
• whether the property is exempt, and
• whether you file for Chapter 7 or Chapter 13 bankruptcy.

(Learn about the difference between Chapter 7 and Chapter 13 bankruptcy.)

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 anything that's deemed property of the bankruptcy estate to pay back your creditors. But in Chapter 13 bankruptcy, the value of any assets sold as property of the bankruptcy estate must be paid to your unsecured creditors (like credit card companies) as part of your repayment plan.

Exemptions Protect Your Property in Bankruptcy

Under state and federal bankruptcy laws you're allowed to "exempt" certain properties up to a specified dollar amount. Exempted properties aren't part of the bankruptcy estate—you get to keep them. Bankruptcy exemptions are protected in Chapter 7 bankruptcy.

In Chapter 13 bankruptcy, exemptions reduce the amount you have to pay back to unsecured creditors. So, if your jointly owned property has no equity or is fully exempt, it won't be affected by your bankruptcy. But if it isn't fully exempt, it's a different story.

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 that person's separate property. So, 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 isn't part of the bankruptcy estate, a Chapter 7 trustee might be able to sell the entire property if your portion isn't exempt. For that to happen, the trustee must:

• be unable to sell only your share (meaning the property can't be divided), and
• prove that the benefit of selling the property as a whole outweighs any harm to the joint owner(s).

If the court allows the sale of the entire property, the trustee must pay the co-owner(s) their share of the proceeds. These rules apply no matter who your co-owner is.

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. (It's treated as if each spouse owned 100% interest in the property.) In these states, almost all assets acquired during the marriage are considered community property. This holds true even if the other spouse isn't on the title to the property.

Even if you're filing an individual bankruptcy (and your spouse isn't filing bankruptcy), all community property still becomes property of the bankruptcy estate because each of you is deemed to own the asset in its entirety. So, unless you can exempt the entire asset, it can be taken and sold in Chapter 7 bankruptcy.

Note that if you live in a community property state and can't exempt all your community property, it might be in your best interest to file jointly with your spouse because some states allow married couples filing bankruptcy jointly to double their exemptions.

Special Rules for Tenancy by the Entirety

In certain states, married couples can hold property as a single marital entity in "tenancy by the entirety." Depending on your state's laws, if only one spouse files for bankruptcy individually, a tenancy by the entirety might be treated as exempt. But keep in mind that if you file a joint bankruptcy with your spouse, property owned in tenancy by the entirety will typically not be exempt.

Understanding How Bankruptcy Affects Your Property

Bankruptcy exemptions allow you to protect certain types of property in bankruptcy. The federal government and each state use different rules regarding bankruptcy exemptions.

Before filing your case, whether Chapter 7 or Chapter 13, you'll need to understand the exemption laws that apply to your case. And you'd probably benefit from talking with a bankruptcy attorney to make sure you can keep the property that's important to you.

Learn more about what you should consider when you're thinking about filing for bankruptcy.