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The Most Costly Community Property Blunder

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california map with roadsWhat do you do when creditors from your spouse’s past threaten?

Chances are your first reaction is to put the title to your biggest assets in just your name.

Whew! Safe.

Not.

Just because  the deed to the house now reads Jane Doe instead of John Doe and Jane Doe it’s easy to think the house is Jane’s separate property and  the operation of California community property law has been beaten back.

Wrong.

Character matters, even for property

Why does it matter whether the house or a business is community property?  Because the character of the property determines which creditors of the married couple can levy on the asset to pay a debt. [Read more…]

Marital Separation Doesn’t Require Two Homes

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Split the sheets in California, and your wages are no longer community property.

That’s because property acquired during marriage but after a marital separation isn’t community property.

That’s been California law for a long while.

The sticky wicket has been drawing the line when the marriage has broken down and the couple has separated.

“When” they separated determines whether the estranged spouses have to split their earnings with each other.  It determines whether the creditors of one spouse can reach the wages of the other to pay the other’s debts.

Can estranged spouses live under the same roof and be living “separate and apart”?

Supreme Court makes separation expensive

In 2015, the California Supreme Court ruled that a couple isn’t “separated” when they live in the same house.  Even when they  shared little else besides the address.

In the Bay Area,  land of ruinous housing prices, I’ve seen many estranged couples continuing to share a house for a long while because neither can afford to move out.

Yet, according to the Davis decision, a couple is not separated and they continue to acquire community property until they no longer live in the same dwelling.

New law looks beyond common address

The justices kinda invited the legislature to change the law if they didn’t like the Davis result.  And they did.

New California law provides that spouses can live “separate and apart” under the same roof for purposes of California community property law.

Seven things you probably didn’t know about community property

The new law makes determining the date of separation messier, but more in conformity with economic realities.

A court trying to determine whether assets are community property has to look beyond the residence address.  Other indicators, not just where the spouses live, can show that there is no intention to resume the marriage.

Why this matters

Assets acquired during marriage and before separation are community property.  Simplest example is wages.

But suppose one spouse starts a business or writes a best seller when the marriage is rocky.  If there has been no separation, the business or the book royalties must be divided equally.

If STBX files bankruptcy

If the spouses have separated, different result.  The new asset is the sole property of the spouse who created it.

Or, more prosaically, suppose one spouse buys an expensive new car.  If they’ve separated, the debt is exclusively the responsibility that of the borrower.  If they aren’t living “separate and apart”, the debt is payable from the community.

Dividing debts in divorce

The new look at what it means to live “separate and apart” will inject more reality in the the “when” question, at the expense of making the determination more complex.

Image courtesy of  John Getchel  under a Creative Commons license.

When Your Ex Files Bankruptcy

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Outrage is the usual reaction when a former spouse who owes you child support or alimony files bankruptcy.

It reinforces all those less-than-flattering thoughts you harbor about your ex.

But maybe that’s not the right reaction for two reasons, one old, one new.

One is old: support debts can’t be wiped out in bankruptcy.

The second reason is new: failure to pay support is grounds for dismissal of a bankruptcy case.

You may have levers that weren’t available to you before as a former spouse. [Read more…]

Five Ways To Bankruptcy Proof Your Divorce

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bullet proof vestIf you want to survive the bankruptcy of your ex spouse unscathed, you need to consider the bankruptcy possibility during the divorce.

A marital settlement, binding outside of bankruptcy, means little in Chapter 13.

No matter how prejudicial or unfair, a Chapter 13 discharge will relieve a former spouse of obligations of all obligations to their ex except for support.

It’s too late to protect your hard won rights to non support payments once the bankruptcy is filed.

Let’s look at how ex spouses are vulnerable to a bankruptcy discharge, then explore ways to eliminate or reduce your exposure to a later bankruptcy filing by your ex.

Only in 13

Chapter 13 is a reorganization plan for individuals with regular income and debts less than the statutory ceilings.

It’s the only kind of bankruptcy case that allows a debtor to discharge non support obligations to a former spouse.

All debts owed to a spouse or child are non dischargeable in Chapter 7.

So, any obligation to pay to equalize the division of property or any obligation to hold a former spouse harmless from a debt of the marriage is ripe for discharge in Chapter 13.

The only lever a creditor-spouse has is to challenge the confirmation of a Chapter 13 plan for failure to comply with the law or for lack of good faith.  That’s chancy and expensive.

Prevention is more reliable.

Make your divorce bankruptcy-proof

Here are five strategies to insulate the division of assets and debts from upset by a Chapter 13 bankruptcy by one of the former spouses. [Read more…]

Bankruptcy Upsets The Divorce Property Division

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bankruptcy upsets divorce divisionThe divorce was over.

The assets were divided by a final judgment.

The house would go to Him, and he would pay Her $75,000 on stated terms.

It was the end of a miserable stretch in their lives.

Only it wasn’t.

Before anyone recorded the judgment of dissolution (that’s Californian for “divorce”), She filed bankruptcy.

And He found out about Bankruptcy Code  §544.

Powers of a bankruptcy trustee

When a bankruptcy is filed, all of the debtor’s assets become part of the bankruptcy estate.

OK, in our situation, She no longer owned an interest in the house:  it was awarded to Him.  When She filed bankruptcy, the house wasn’t hers.

But the bankruptcy code gives the Chapter 7 trustee powers to avoid certain transfers of property and to bring assets back into the estate that weren’t there when the case was filed. [Read more…]

Dividing Debts At Divorce: What You Need To Know

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The division of the debts of a failed marriage, however carefully crafted at divorce, can be utterly destroyed if one of the former spouses files a Chapter 13 bankruptcy.

A Chapter 13 discharge is double barreled.  It will eliminate the debts that the filing spouse owes to creditors.  It also wipes out any obligation to the debtor’s former spouse to shield the ex from those debts.

It gets worse:  any obligation of one party to pay the other to equalize the division of assets can be wiped out in a Chapter 13.  (Support debts survive; they aren’t dischargeable anywhere, any time.)

All parties, the divorcing spouses and their family law attorneys, need to consider the impact on the division of assets and liabilities if either spouse drops the bankruptcy bombshell.

Debts divided and protection promised

Where both spouses are liable on a debt, the divorce agreement often does two things.  It assigns the debt to one spouse for payment.  Two, it imposes on that spouse an obligation to indemnify the other spouse.

“Idemnify”  isn’t in most folks’ standard vocabulary.  According to Merriam Webster, it means

to protect (someone) by promising to pay for the cost of possible future damage, loss, or injury

The spouse who’s to pay the debt promises to pay the former spouse if the creditor has to collect the debt from the other party.  So, the divorce decree creates two duties for the spouse to whom the debt is assigned:  pay the creditor, and if you don’t, protect your ex from that creditor.

Different chapters of bankruptcy treat the obligation to a former spouse for indemnification differently.   In Chapter 7, that obligation is not dischargeable.  In Chapter 13, it can be discharged.

But why, you ask, doesn’t the divorce judgment bind the creditor, too? [Read more…]

“Hold Harmless” Survives “To Have and To Hold”

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money trouble

 

Divorce usually requires the division of the debts of the marriage along with the assets.

The legalese usually requires each party to indemnify and hold harmless the other from the debts assigned to that party.

Most folks skim over that provision to worry about the division of assets or support issues or the termination of their status as married people.

Indemnification is worth another look.

Long after the personal property that was divided has worn out and the need for support has passed, the right to indemnification may live on.

Given the length of some statutes of limitation and an industry selling and collecting on time barred debt, the obligation to indemnify your ex may live longer than the marriage.
[Read more…]

Bankruptcy And Divorce Collide: The Revenge Filing

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My soon-to-be ex threatens to file a bankruptcy tomorrow and get me kicked out of the house.

The frantic voice on the phone wanted to know whether he could do that in California.

Or better, how he could be stopped from upsetting the pending divorce through the bankruptcy courts.

Welcome to the volatile collision between bankruptcy and divorce.

Let’s walk through the bankruptcy law that affects those in the middle of a divorce.

Everyone has the right to file bankruptcy

No one can be ordered not to file bankruptcy.

Bankruptcy relief is a right under federal law.  No state court can prevent someone from filing; no agreement to refrain from filing is enforceable.

Interested parties can police the debtor’s compliance with bankruptcy law, with an eye to pushing the debtor out of bankruptcy or into a reorganization chapter, but they can’t prevent a bankruptcy filing.

All community property comes into bankruptcy

The woman on the phone was right to see that the family home would be sucked into any bankruptcy case her estranged husband filed. [Read more…]

Divorce And The Ticking Debt Bomb

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Debts of the marriage often outlive the marriage itself.

Yet left-over debts are nothing but trouble.

But too often, divorcing couples don’t mop up the joint debts they held during the marriage, and the situation blows up years later when one ex-spouse hits financial trouble.

Joint account remained open after divorce

It’s playing out in a bankruptcy case I have now:

  • divorce final for decades.
  • no balance on joint line of credit when the spouses divorced
  • no one closed the account

When one spouse hit a rough patch, she accessed the left-over line of credit, big time.  But it wasn’t enough to avoid the need for bankruptcy. [Read more…]

Same Sex Couples No Different In Bankruptcy

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gay couple-flicker cc croppedSame sex couples encounter financial troubles no differently than heterosexual couples.

We live in “interesting” times as bankruptcy courts feel their way through the collision between  California’s state laws on domestic partnerships and married same sex couples and the federal law found (and now ignored) in DOMA.

Lead by judges in the Central District of California,  the Northern District of California bankruptcy judges have quietly but publicly stated that they will not sua sponte challenge joint filing by same sex married couples.

But whether a couple are registered domestic partners or married, under California law, they have community property. [Read more…]

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