How Filing for Bankruptcy Affects Jointly and Separately Owned Property in a Divorce

chapter 7 bankruptcyIf you are faced with divorcing your partner and may want to declare bankruptcy, it is important to consider how filing for bankruptcy will affect property you own jointly and separately. Whether you should file bankruptcy jointly or separately depends on the laws in your state regarding marital property. The following will discuss your bankruptcy options and the implications of filing for bankruptcy jointly, and separately.

Bankruptcy Options

When filing for bankruptcy, regardless of whether you file alone or jointly, you have the option of filing chapter 7 bankruptcy or chapter 13 bankruptcy. Under chapter 7 bankruptcy, a trustee is allowed to take your property to offset the debt. However, only non-exempt property will be taken, and you are allowed to keep any exempt property. Federal or state exemption laws determine which of your property is untouchable during a bankruptcy case. After the trustee has taken all your nonexempt property, all your dischargeable debts will be cleared. The process may take between 4-6 months.

Under Chapter 13, the law allows you keep your property. It involves making monthly payments based on a repayment plan aimed at clearing all or some of your debts. This repayment plan lasts between 3-5 years, based on your income, and the amount of debt you owe.

Many couples prefer to file a joint chapter 7 bankruptcy before a divorce, because it takes less time compared to a chapter 13 bankruptcy that is better filed separately.

Filing Bankruptcy Jointly

If you file for a bankruptcy jointly, all the property you own, whether together or separately, will be included in the bankruptcy case. Your combined debts will also be subject to the bankruptcy, meaning that discharge from debt applies to both of you.

In some states, married couples are allowed to file jointly for double exemptions. If, for example, you are exempt to $30,000 home equity, if you file together with your spouse, you could be exempt to up to $60,000. However, not all states apply these exemptions. If doubling of exemptions is allowed in your state, filing jointly is a smart strategy if you own a large portion of your assets, and have the largest share of debt.

Filing Bankruptcy Separately

When you file separately for bankruptcy, the bankruptcy proceedings affect your property alone. However, if you are in a community property state, and you and your spouse have signed an agreement to treat your combined property as community property, filing separately also affects your spouse's property. Community property is any property either of you receives or earns during marriage. In states that apply common law, when you file for bankruptcy separately, half of the marital property is subject to the bankruptcy case. This means that if filing Chapter 7 separately, all your non-exempt community property could be taken by the trustee. However, in common law states, only your half of non-exempt marital property, will be taken by the trustee.

In some cases, when filing separately is prejudicial to a couple's debtors, the court may order the estates of you and your spouse to be substantively consolidated, so that you may both choose one exemption scheme, and creditors can be recompensed from a joint pool of non-exempt assets.

Filing Separately and Liability for Debts

If you file for bankruptcy separately, your spouse's separate debts, such as medical bills or student loans, will not be impacted by your case. This means that your spouse's debts will not be discharged after your case is finalized.

If you jointly owe debts, and you file for bankruptcy separately, you will leave your spouse liable for the amount you owe. Chapter 7 bankruptcy relieves you of any liability for dischargeable debt; however, it does not affect the liability of your spouse.

Filing for Chapter 7 Bankruptcy is complicated under any circumstances. Georgia Debt Relief is here to help! Call us for expert advice on how to proceed with your financial matters in a divorce or any other difficult time.