What Happens to Jointly Owned Property in an Individual Bankruptcy?

If you own joint property with someone else, filing for bankruptcy can affect a co-owner. How your individual bankruptcy will affect jointly-owned property will typically depend 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.

Keep in mind that because of the complexity of the area and state law differences, filing for bankruptcy can impact property owned jointly and separately in unexpected ways. Consult a local bankruptcy attorney to determine whether you'll lose property before proceeding with bankruptcy.

How Exemptions Protect Bankruptcy Property

When you file for bankruptcy, you relinquish ownership of almost all your assets, and they become property of the bankruptcy estate. However, in most instances, it's temporary. State and federal bankruptcy exemption laws allow you to protect or "exempt" particular assets entirely or up to a specified dollar amount.

If your jointly-owned property has no equity or is fully exempt, you won't need to be concerned about the trustee selling it or paying the trustee to keep it. But if it isn't fully exempt, it's a different story.

What happens to nonexempt property not covered by a bankruptcy exemption depends partly on whether you file for Chapter 7 or 13. You pay to keep property in Chapter 13 that you would otherwise lose in Chapter 7. Here's how it works.

In Chapter 7, the Chapter 7 trustee can sell property within the bankruptcy estate to pay back creditors if the asset's equity exceeds the amount you can protect with a bankruptcy exemption. In Chapter 13, your unsecured creditors, like credit card companies and medical providers, are entitled to receive the value of your nonexempt assets as part of your repayment plan. You must pay to keep nonexempt property.

Keep in mind that if the property is financed, you could lose it to the lender, but that is a separate issue. For example, you must continue paying your mortgage to keep your home. The same applies to auto loans when you want to keep a financed car in bankruptcy.

Joint Property 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 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 because 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 coowner 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.

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 for bankruptcy 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.

Learn How Bankruptcy Will Affect Your Particular Property

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.