Community Property and Filing Separately

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Many of you who are considering filing bankruptcy separately from your spouse are often confused as to what belongs to you and what belongs to your spouse. In all bankruptcy filings, you have to list your assets owned and all your expenses when you make your application to file.

Depending on whether or not you live in a community property state will determine how you divide up your assets when filing bankruptcy separately from your spouse, but when filing bankruptcy jointly with your spouse, there is really no need to divide up your assets. Filing bankruptcy jointly would require you to list all your current assets regardless of how and when you acquired them.

Importance of Knowing State Property Laws

When you are filing bankruptcy, it is important to know whether or not you live in a community property state. If you do, you are required to abide by the community property laws when you file bankruptcy. There are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Alaska is an opt-in community property state that gives both parties the option to make their property community property.

Community Property States

A community property state presumes both spouses equally own all marital property and it will be split 50-50 in a divorce. For filing bankruptcy purposes in a community property state, unless your spouse owns property you can prove has never been owned jointly, you will have to list 50% of the value of the property as part of your assets. If you can prove certain property owned by your spouse has never been owned jointly, you do not have to list the property as one of your assets when filing a bankruptcy.

Non-community Property States

In non-community property states, you need only to prove your share of ownership in order to list the asset when filing bankruptcy separately. When filing bankruptcy jointly, there is no need to prove what share of the assets you own.

The IRS can help you decide how community property is determined for a bankruptcy.

IRS publication 555 defines community property as:

  • that which you, your spouse, or both acquire during your marriage while you and your spouse are domiciled in a community property state

  • that which you and your spouse agreed to convert from separate to community property
  • that which cannot be identified as separate property

IRS guidance is also given regarding what is considered separate property:

  • property you or your spouse owned separately before your marriage
  • money earned while domiciled in a non-community property state
  • property you or your spouse received separately as a gift or inheritance during your marriage
  • property you or your spouse bought with separate funds, or acquired in exchange for separate property, during your marriage
  • property you and your spouse converted from community property to separate property through an agreement valid under state law
  • the part of property bought with separate funds, if part was bought with community funds and part with separate funds

As you can see, filing bankruptcy separately or jointly can be a complicated process that may require the experience of a bankruptcy lawyer.

 

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