Bankruptcy In A Community Property State
Texas is one of ten community property states in the United States; all other states are what is known as common law or equitable distribution states. In Texas, property inside of a marriage is either jointly held or held separately which is an important distinction for the purposes of bankruptcy.
Separate property is defined as:
- Property owned before the couple married.
- Property a spouse acquired at any time via a gift or inheritance.
- Recoveries for personal injuries sustained by a spouse during the marriage not including compensation given for loss earnings.
- A property exchanged for the items listed above.
Community property is any property that is not separate property acquired by either spouse during their marriage.
If a married debtor living in Texas decides to file bankruptcy without their spouse, their spouse's separate property, as defined above cannot be included in the bankruptcy estate. However, it is very important that debtor use caution when defining what separate property is during bankruptcy. If the bankruptcy trustee doesn't agree with the debtor's definition of what is community property versus separate property in the marriage, they have the right to investigate further. And if it is found that the debtor has mislabeled property in the marriage as separate property when it is in fact community property they could face a bankruptcy dismissal.
One of the biggest mistakes that debtors make when they are married and considering bankruptcy is commingling their separate property with community property. For example, a debtor may receive an inheritance. If they take the inheritance and place it in a joint bank account, it may be difficult to distinguish it from the community assets in the bank account. However, it will be up to the debtor to prove to the bankruptcy court that a certain part of the cash in the account is separate property.
Once community and separate property is determined in the bankruptcy, the debtor's separate property and 50 percent of their community property will become part of the bankruptcy estate.