How Community Property is Distributed in Bankruptcy

Some states, including Texas, recognize all of the property acquired during a marriage to be community property. This means that each spouse has an equal stake in the property, even if one spouse earned all of the money in the marriage.

How are sub-estates created from community property?

When a person owning community property files for bankruptcy, this property is set aside from their separate property. Separate property includes assets and property a person owned before getting married and all of the gifts and inheritances they may have received while they were in the marriage. The community property is divided into a sub-estate, and will be paid to creditors of the estate in order of importance.

There are four different types of sub-estates that property will be divided into:

The community property of the state, with the exception of any property that has caused debts from bankruptcy
The community property responsible for the debtor’s debts, such as homes or cars
Property claimed by the debtor that is not community property
Any surplus of property that is not addressed in the other sub-estates
Should the couple file for bankruptcy, either together or separately, the sub-estate will be combined for the sake of the creditors.

Order of Community Property Sub-Estates in Bankruptcy

Claims made against the debtors will need to be paid off from the existing property. Any debtor who has a community claim will be paid from the community property pool, both those that have caused debts or not. Once these debts are paid, any remaining property will placed in the surplus sub-estate.

If a debtor has separate debts from their community property, these will be paid from the property they own that is not community property. Separate debts will be paid from separate property. Community claims cannot be taken from separate property. Any extra property will be moved into the surplus sub-estate.

Finally, any remaining community claims will be paid from the surplus property. If there are no remaining claims, the debtor remains in possession of this property, and creditors do not have any more access to their property.

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