COMMUNITY PROPERTY VS. JOINT TENANCY IN BANKRUPTCY
In California, property acquired during the course of a marriage is community property. If one spouse files bankruptcy, all community property becomes property of the bankruptcy estate and is subject to liquidation by the trustee for the benefit of the creditors. However, if property is held by husband and wife as joint tenants, only the interest of the spouse who files a bankruptcy petition becomes property of the bankruptcy estate. This distinction is important when planning to protect the family home from creditors. If a husband and wife own a home with up to $150,000 in equity, the home would be exempt from creditors of one spouse, if it was held in joint tenancy, but not if it was community property.
For example, Harold and Wendy have a young son and own a home worth $450,000. There is a $300,000 mortgage on the home. Harold has $500,000 in debts relating to his business, but Harold and Wendy’s mutual credit card debt is only $20,000. If Harold and Wendy own the home as joint tenants, Harold can discharge all of his business debt by filing a Chapter 7 bankruptcy. The $150,000 equity remaining after a theoretical sale would be split. Wendy would keep a her $75,000. The remaining $75,000 would be protected by Harold’s homestead exemption. Harold and Wendy would keep the house, but Wendy would still be liable for the $20,000 in credit card debt. Note also, that if Harold and Wendy had no other family members in the home, Harold would only get a $50,000 exemption. See: In re McFall, 112 B.R. 336 (9TH B.A.P. 1990).
On the other hand, if the house were owned by Harold and Wendy, husband and wife as community property, the entire $150,000 equity would be part of the bankruptcy estate. Harold and Wendy would have a $75,000 homestead exemption even without other family members at home, but the remaining $75,000 of equity would be available to pay the creditors. In this case, Harold and Wendy would file a joint petition in bankruptcy and discharge both Harold’s business debt and the mutual credit card debt. However, their home would most likely be sold to obtain the $75,000 for the creditors. They would receive $75,000 from the proceeds of the sale to cover their exemption.
Thus, in bankruptcy there is a substantial advantage for debtors who own their home as joint tenants, rather than as community property.
Recently, a bankruptcy trustee attempted to sell a home that was owned in joint tenancy by a debtor and his spouse, who did not file a bankruptcy petition. The trustee argued that, since the home had been purchased with community property funds, it should be considered community property and the entire equity made available to creditors. The Ninth Circuit Court of Appeals, in the case of In re Sumners, 278 Bk.Rptr. 808 (2002), disagreed with the trustee. It held that when property is acquired from a third party in joint tenancy, it cannot be presumed to be community property simply because community property funds were used to purchase it.
