By Kitty J. Lin
When you file for bankruptcy all property you own at the time of the bankruptcy filing is considered part of the bankruptcy estate. If you live in one of the nine community property states like California, Nevada, Arizona, Idaho, Louisiana, New Mexico, Texas, Washington, and Wisconsin, all of your spouse’s community property owned will belong to the community and will therefore be included in the bankruptcy estate as well. If both you and your spouse are filing for bankruptcy together you do not need to worry about what is considered separate property or what is considered community property. All property will be included in the bankruptcy estate. Make sure you disclose all of your separate property and community property to your bankruptcy lawyers.
If only one spouse is filing for bankruptcy, all community property will be included in the bankruptcy estate. Separate property of the non-filing spouse will not need to be included in the bankruptcy estate. In order to understand this concept you need to know what the difference is between separate property and community property. All property acquired during marriage is considered community property and owned jointly by both spouses. Employment earnings during marriage are considered community property. Conversely, all property owned prior to marriage, or acquired by one spouse during marriage by gift, bequest, or inheritance and the rents, issues, and profits from these properties are considered separate property. See Family Code §770. Additionally, all property acquired after a legal separation are considered separate property of the person acquiring the property. See Family Code §772.
Sometimes property is commingled during the marriage. If the property is so mixed up that you cannot determine what is considered separate property and what is considered community property, then the property will become community property. For example, husband has a checking account that is solely in his name prior to marriage. This checking account is considered separate property and all interest derived from this account is considered separate property. However, during the marriage he has his paychecks directly deposited into this account. He uses this account for everyday household goods. The paychecks deposited during marriage are considered community property. Even though this account started out as separate property the checking account lost its separate property status when community property is mixed in the account and it became too hard to trace what is considered separate property and what is considered community property.
So why is it so important to determine whether something is considered separate property or community property? Separate property owned by the spouse that is not filing for bankruptcy does not need to use his or her separate property to pay off community debts. Therefore, when one spouse is filing for bankruptcy, the non-filing spouse’s separate property assets are not thrown in the bankruptcy estate to satisfy creditors. The non-filing spouse’s separate property will not need to be protected and use up the exemptions. Only the community property of the couple will need to be protected his or her bankruptcy filing.
When only one spouse is filing for bankruptcy, it may be confusing to determine what is community property and what is separate property as some of these assets may be commingled. You should contact an experienced bankruptcy attorney before proceeding if you want to file for bankruptcy without a spouse.