In a recent landmark decision, the U.S. Supreme Court declared Section 3 of the Defense of Marriage Act (DOMA) (which had denied federal benefits to legally married same sex couples) to be unconstitutional. United States v. Windsor, 570 U.S. ___ (2013).
For bankruptcy purposes, this decision means that legally married same sex couples can now file a joint bankruptcy petition. But what happens if you are a same sex couple that is not legally married? Read on to learn more about whether unmarried same sex couples can file a joint bankruptcy petition and what happens to their joint property and debts in bankruptcy.
For more information on other bankruptcy filing considerations, visit our topic area on Bankruptcy: Should I File?
Unmarried Same Sex Couples Are Not Allowed to File a Joint Bankruptcy
Because the U.S. Supreme Court has struck down Section 3 of DOMA, legally married same sex couples can now enjoy the same federal benefits afforded to other married couples such as the right to file a joint bankruptcy petition. Unfortunately, these benefits extend only to same sex couples that are legally married. Unmarried same sex couples are not allowed to file for bankruptcy jointly.
(To learn more about the DOMA case and its impact on bankruptcy, see Same-Sex Married Couples & Bankruptcy: Can You File a Joint Petition?)
If you are not legally married but have a significant amount of joint property or debts with your partner, your individual bankruptcy can still affect your partner. Below, we discuss what can happen to your joint property and assets if your partner files for bankruptcy.
What Happens to Your Joint Property in Bankruptcy?
Even if you are not legally married to your partner, your bankruptcy can affect your joint property and debts. In certain states, if you are registered as domestic partners, the law may even treat your joint property the same as marital property. This means that how your joint property will be treated in bankruptcy will depend on:
- whether you live in a common law or community property state, and
- whether you are registered as domestic partners.
To learn more about the differences in marital property ownership rules (which can apply to registered domestic partners in some states) in common law and community property law states, see Marriage & Property Ownership: Who Owns What?
Common Law Property States
In common law property states, if you file for bankruptcy without your partner, only your individual interest in your joint property becomes property of your bankruptcy estate. Your nonfiling partner’s portion is not part of your bankruptcy.
But keep in mind that in Chapter 7 bankruptcy, the appointed bankruptcy trustee can sell your nonexempt assets to repay your creditors. If you can’t exempt the value of your interest in a jointly owned piece of property, the trustee may be able to sell the entire asset. In general, to sell the entire jointly owned asset (including your partner’s share), the trustee must show that:
- it is not possible or practical to divide the property
- selling the entire asset free of your partner’s share would result in significantly higher proceeds than selling your share alone, and
- the benefit to the bankruptcy estate of selling the entire asset outweighs the detriment to your partner.
If the court allows the trustee to sell the entire jointly owned property, the trustee must still pay your partner the value of his or her interest in the property from the proceeds of the sale.
For more information how to protect your property in bankruptcy, see our Bankruptcy Exemptions topic area.
Community Property States
In community property states, all property acquired by either spouse during a marriage is owned equally by both spouses regardless of who is on title or who purchased the asset. In certain states, registered domestic partners are also subject to the same community property rules. In bankruptcy, all community property is considered property of the estate that may be administered by the court.
This means that if you are registered as domestic partners (even if you are not legally married) and your state treats the property you acquire during your partnership as community property, your partner’s interest in your community property will also be fair game in bankruptcy. Because the interaction between community property, domestic partnerships, and bankruptcy can be complex, consider talking to a knowledgeable bankruptcy attorney prior to filing your case.
What About Your Joint Debts?
If you file for bankruptcy individually, your discharge typically only eliminates your personal liability for joint debts included in your bankruptcy. This means that your partner will remain on the hook for your joint debts after your bankruptcy is closed.
But you still have options if you want to protect your partner from your joint creditors. In Chapter 7 bankruptcy, you can reaffirm the joint debt or simply continue to pay it after you receive your discharge. If you file for Chapter 13 bankruptcy, you can pay off the joint debt through your repayment plan while your partner is protected under the Chapter 13 codebtor stay.
To learn more about how to protect your codebtors in bankruptcy and the Chapter 13 codebtor stay, see Will Your Cosigner Be Liable for Debt if You File for Bankruptcy?
Community Property Discharge
If you are registered as domestic partners and the community property rules discussed above apply in your bankruptcy case, your discharge prohibits any joint creditors included in your bankruptcy from going after your community property (including your partner’s share) acquired after your case is closed. This essentially means that your domestic partner also receives the benefit of your discharge (this is commonly referred to as a phantom or community property discharge).