The Legal Impact of A Single Spouse Filing for Bankruptcy

There are some situations in which married spouses may find it advantageous for one spouse to file for bankruptcy, but not the other. Part of it depends on the type of bankruptcy sought (Chapter 13 versus Chapter 7), the type of debts held and whether you live in a community property state.

D.C., Virginia and Maryland are all common law states, which means spouses could be at somewhat of a disadvantage if their spouse files and they share joint debts because they could be pursued by creditors for the full amount of the remaining balance.

Washington DC Chapter 7 bankruptcy attorneys are committed to helping debtors sort through these issues to determine which route will best preserve your financial well-being, both individually and as a couple.

In Kim, et al v. Dome Entertainment Center Inc., the U.S. Court of Appeals for the Fifth Circuit affirmed an earlier ruling by the bankruptcy court that the trustee could legally force the sale of property a couple jointly held, and that compensation for the spouse need only be for the dollar amount of the exemption listed in U.S.C. 522(p) – or no more than $125,000.

The case originate out of Texas, where the non-debtor spouse argued her homestead rights in the residence she shares with her husband – who filed for bankruptcy on his own – precluded the forced sale of the property. Alternatively, she insisted that if a sale did occur, she should be compensated for the full loss of her homestead interest in the property.

The home had been purchased for a little more than $1 million. At the time of that purchase, litigation was pending between the husband and Dome Entertainment Center.

Two years later, the court entered a judgment against the husband for $5 million. When the husband filed for Chapter 7 bankruptcy, the company filed a petition for relief against him. Following a trial, the bankruptcy court entered an order of relief under Chapter 7. The case was subsequently converted to a Chapter 11.

The husband attempted to claim an unlimited homestead exemption under Texas law. However, the bankruptcy court sustained an objection by the company, which argued the exemption should be limited to the amount in federal statutes.

It was at this point the debtor’s wife got involved, and both she and the company filed cross motions for summary judgment, seeking determination of whether she retained her homestead interest in the house and, if so, to what degree.

The bankruptcy court granted the company’s motion in part, and denied the wife’s as a whole. The court held that federal statute overrides state law, and that the non-debtor spouse couldn’t claim a separate, distinct exempt homestead interest in the property that would entitle her to compensation or halt the sale of the property.

The federal appellate court affirmed, pointing to the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, which specifically limits state homestead exemptions in certain situations. U.S.C. 522(p) was designed to limit the so-called “mansion loophole” that previously allowed debtors to shield virtually all equity in their homes from creditors. Some debtors were even found to have relocated to these areas specifically for that purpose.

Pointing to previous precedent in similar cases set by both the U.S. Supreme Court and the Texas Supreme Court, the appellate court rejected the argument that the wife’s homestead rights were separate property belonging to the wife and not an interest of the debtor’s.

When only one spouse files for bankruptcy, this case shows there can be some unintended consequences. The last thing you want in a bankruptcy is surprises. We can help you navigate the process.

Contact Harris S. Ammerman, bankruptcy attorney serving Washington D.C., Maryland and Virginia, by calling (202) 638-0606.

Harris Ammerman
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