Try The Community Property Two Step

Life  and debt often presents us with conflicting imperatives.

Bankruptcy is required, but when to file?

One pressure says:  File now!

Another issue says: Wait!

I saw this vividly this week when the couple walked in with a foreclosure sale in two weeks and $40,000 in taxes that won’t be dischargeable for 18 months.

There’s no money to pay the non dischargeable taxes if we file now, and there’s no place for three generations to live if we let the foreclosure sale go forward.

It looked hard, until I noted that there were two people sitting across the table: two people, each of whom was entitled to their own bankruptcy discharge.

And better yet, because we’re in California, we can file their individual cases 18 months apart and still be protected against tax collection while we wait out the aging of the taxes.

Let’s talk about the community property discharge.

Community property and bankruptcy

Section 541 of the bankruptcy code brings all of the community property of a married couple into the bankruptcy estate, even if only one of the spouses files bankruptcy.

Seems kinda harsh, that the non filer’s undivided one half interest gets dragged into the case of their spouse, with or without their consent.

But there’s a sweetener:  section 524 provides that all of the couple’s community property going forward is protected by the discharge injunction from the creditors who existed as of the commencement of the bankruptcy case.

That protection extends both to the exempt property that survives the bankruptcy and to all the community property they acquire in the future, for so long as they are married and acquiring community property.

Straight-arm the taxing authorities

For my couple, it works this way.  We file one spouse now to  stop the foreclosure.  We give notice to all holders of community claims as defined in §101(10).

The community property will be exonerated from liability for all of the dischargeable debt .  The taxes will survive since they aren’t dischargeable right now.

When the taxes are old enough to discharge, the other spouse files.  Her discharge in the later case eliminates her personal liability for the tax and protects the community property going forward from collection actions, even tho her spouse remains legally liable for the tax.

 Image courtesy of caffeina.