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At the very least you would need to do an analysis of your community half of assets/debts to see whether you (individually) qualify as insolvent. Much will depend on the value of the house. Clearly her 401k is community property IF it was earned during the marriage. To the extent that some or all of it existed prior to marriage, that part would be her separate property. Unless she signed the credit document OR you used her income/assets to establish the credit amount, it is likely that you can exclude her community half as well as any of her separate property in determining the insolvency question.
I don't see how it depends on the value of our house.
If under community property law half of my personal liabilities belongs to her, leaving me liable for $60K only, and half of her 401K is my asset ($75K), it clearly means that I can't claim insolvency. Am I right?
It is impossible for me to say with absolute assurance because I may not know all of the facts and circumstances. However, it is possible that because the $120k debt is in your name alone that it would go completely on your side community property laws notwithstanding. I have seen many cases where one spouse is not held liable (in a divorce or similar situation) when they did not participate, i.e. sign the documents, in procuring the debt. so, potentially, you have $120k debt, $75 community interest in her 401k (assuming that it is 100% community property), and then your share of the net value of the house. That is why I said it could depend on the value of the house.
Just so you understand, I do live and practice in Texas and I have fairly extensive experience in the application of community property laws in domestic situations. I can't say for sure how your situation would be handled but I am not just making things up either. I think there is a potential for you to exclude this income - it may or may not work out that way.
Unfortunately, the site operator does not allow for that circumstance. Your best bet would be to make some phone calls and find someone that can help. You might call a faimly law attorney and ask for a CPA reference - the attorneys should know who in your area is qualified.
I'll be very specific this time and detailed -
House equity - $120K, my wife's 401K - $150K, cars value - $20K, I have $6K in my IRA
She also has $30K in checking account as a result of the car accident settlement in 2007 (we still have a copy of the check from the insurance company), and I hope that is her money and not the community property (***).
Debts: $148K to banks and credit cards plus $11K of my business related personal debts (not documented but friends-creditors can confirm) she doesn't know anything about. Personal debts were taken to cover my payments to banks and credit cards. All debts are on my name only, my DBA business related and I didn't use her income to establish the credit amount (****).Plus we have $6K of the student loan
Assets (120+150+20+6) / 2 = $148,000Liabilities 148 + 11 + 6/2 = $162,000
If the statements (***) and (****) are correct I can exclude $14,000 of the 1099-C amount from our income (filing joint return). Could you please confirm that?