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Does Marriage Make Me Liable For My Spouse’s Debts

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Liability of community property in California

Countless times, a client announces that he won’t marry the love of his life until he’s fixed his debt problems.

Noble thought, but unnecessary in California.  Even though we have a community property system of marital property.

His bride will not become liable for the debts he brings to the marriage.

If the newlyweds elect to have community property, then the community property is liable for the baggage he brings, but those debts will not follow his spouse.

Personal liability

A basic principle of law is that each person is only personally liable for debts they create: marriage does not automatically make the spouses liable for each others debts. An exception is debts for necessities of life.

In California, a marriage can be seen as comprising three entities (wouldn’t you know it in California):

  • husband,
  • wife, and
  • the community property.

California law assumes that assets acquired during marriage are community property. The entirety of the community property is liable for the debts of either spouse.

Under this system, then, if husband contracts a debt, husband’s creditor can reach both halves of the community property to satisfy that debt.

If the parties don’t have community property, as by reason of a pre nuptial agreement, then the creditor can reach only the husband’s earnings and assets for debts he incurs.

If the spouses divorce, the community is terminated. Once the community property is divided in the divorce, that former community property becomes the separate property of the recipient spouse.

Bringing debts to the marriage

Because community property is liable for the debts incurred by both spouses, before and after they marry, those debts can certainly impact the household finances.

Bankruptcy may be one way to wipe the slate clean.  One spouse can file bankruptcy even during the marriage and get a discharge of that spouse’s debts.  The community property is freed of claims against it for debts discharged in the bankruptcy.

Except for joint debt included in the bankruptcy case, one spouse’s bankruptcy filing doesn’t impact the other spouse’s credit record.

The other approach to an indebted spouse is to make an agreement, preferably before wedding, that limits or negates the acquisition of community property.  That’s a prenuptial agreement.

A debt free spouse with a prenuptial agreement is insulated from loss of wages or property in their name to their spouse’s creditors.

 

More about community property in bankruptcy.

5 Things To Do When You Have Been Sued

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process server badgeThe ring on the doorbell was a process server.

Bingo!  You’ve been sued.

Now what?

Breathe deeply and work your way through this five step check list.  Then I’ll suggest some options.

Scout the territory

1. Look at the caption:  It identifies the parties to the suit.  It’s right below the centered name of the court involved.  The Plaintiff is the person filing the suit:  they have a comPLAINT for which they want the court’s help.

Do you recognize the plaintiff as one of your creditors?   If you don’t recognize the plaintiff, does the complaint explain how the plaintiff comes to assert someone else’s claim against you?

2.  Find any verification:  Attached to the end of the complaint may be a verification.  This is a sworn statement by someone with personal knowledge of the facts that the facts set out in the complaint are true.  If there is no verification, you can file a simple form called a general denial if you want to contest the suit.

3.  Mark your calendar:  In California, you have 30 days from service of the complaint to file an answer.  If you don’t file an answer, you are sure to lose the suit.

4.  Check whether suit is timely:  The statute of limitations in California is four years.  The four-year clock begins tickling when there was last activity on the account, a purchase or a payment.  If it’s been more than four years since you either paid or charged on a credit card, you can win the suit simply, if you file an answer.

5.  Read the prayer:  The prayer is at the end of the complaint, though maybe not the last page.  Determine how much money is at stake, and whether there is any claim that you have committed fraud.  The consequences of letting a fraud complaint go to judgment are much more serious than just a suit for money.

Plan of attack

Once you’ve taken those five steps to figure out who is suing you and what it takes to oppose the suit, you need to decide what to do.

Do nothing

If you do nothing, chances are real good that the plaintiff will ask the judge to enter your default, stating that you haven’t answered.

When you don’t answer a properly served complaint, the court system assumes you agree that you owe the money.  Sooner or later, the court will enter a judgment against you.

Everything you need to know about judgments

A judgment entitles the creditor to use the power of the government to get its money.  In the Golden State, it means the creditor can levy bank accounts, file a judgment lien, and garnish wages.

A judgment is enforceable for 10 years.

File an answer

If you contest the suit by answering, you at least slow the creditor’s march to getting a judgment.  If you have a good defense, you may actually win.

The California court system provides information and resources for those representing themselves without a lawyer.  But as the Alameda County court’s site says:  You cannot come to Court and tell the judge that you are not a lawyer and do not understand what you are supposed to do.  

If you are going to be your own lawyer, you are charged with knowing what a lawyer knows.

Filing an answer at least gives you a position from which you can negotiate a settlement.  Consider whether you have any resources with which to fund a settlement.  How is it possible to pay the debt now when you couldn’t pay before?

Find global debt solution

Whether or not you have a defense to this suit, the filing of a lawsuit should be a red flag for you.

  • Is this suit the tip of the iceberg?
  • Is this creditor just one of many who are poised to sue you?
  • Will a piecemeal approach to your debts really get you anywhere?

It may be time to see a financial counselor or a bankruptcy attorney.  Even if you don’t expect to file a bankruptcy case, a bankruptcy lawyer deals with debt issues all the time and can help you assess your options.

Look at your calendar: you have 30 days in which to plot your course before you are at risk of having a judgment entered.

Make a plan, now, before the 30th day.

More

California protections from debt buyers

Wage garnishments in California

Are California judgments dischargeable in bankruptcy

Image courtesy of nles.com. 

New California Bankruptcy Exemptions

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california exemptions

Californians filing bankruptcy got an increase in the exemptions that protect their assets on April 1, 2019.

Every three years, the dollar amounts are adjusted for changes in the cost of living.

Californians don’t get to protect possessions under the Bankruptcy Code’s exemptions.  Instead, a California resident who files bankruptcy must use California exemption law. That’s the case even though bankruptcy is governed by federal law.

Don’t shed a tear for the bankruptcy exemptions:  the state exemptions are arguably better.

You have a choice of two exemption systems.  One choice is the standard California state law exemptions found in Code of Civil Procedure 704.  These are the exemptions  applicable in state law collections as well as bankruptcy.

The second choice, appealing to those without significant equity in their home, is the California bankruptcy exemptions found at CCP 703.140(b).

What do debtors get to keep

Here’s the new  list of increasedCalkifornia bankruptcy exemptions

Principal residence$29,275
Vehicles$5,860
Household goods per item$725
Jewelry$1,750
Grubstake$1,550
Business assets$8,725
Loan value of life insurance$15,650
Personal injury claims$29,275
Other misc. exemptions703.140

Californians, because they are required to choose one state exemption system or the other rather than the federal bankruptcy exemptions, can also use the federal list of non bankruptcy exemptions.

Bankruptcy wild card exemption

The trickiest part of the California bankruptcy exemptions is what’s called the “wild card”. (It’s also called the “grubstake”.)    When 703.140(b)(1) and (b)(5) are added together, the debtor can protect $30.825 of equity in any asset or combination of assets.  That’s the wild card.wild card exemption

The wild card amount can be parceled out to protect some cash in a bank account;  some equity in a vehicle that exceeds the car exemption; stock; a  business or whatever else you have.

The point is that the exemption isn’t restricted to a certain kind of property.  It can be used to protect anything.

How exemptions work

Exemptions protect the specified amount of equity in an asset.

If it’s a house, the exemption protects a certain amount of value in the property that exceeds the liens on the property.  It doesn’t matter if the value of the house is $200,000 or $1,200,000.  The exemption protects the specified amount of equity in the house.

If there is equity in a house over and above the total of liens and the homestead, a Chapter 7 trustee can sell the house and give the debtor the homestead exemption in cash.

That doesn’t happen very often.  Because, there has to be enough equity to pay the costs of sale, any capital gains taxes and the trustee’s commission before the sale benefits creditors.

More about secret exemptions

If neither California exemption system adequately protects your  assets, consider Chapter 13.

More

Exemptions in Chapter 13

Debts of spouses

Image courtesy of Flickr and k2d2vaca.

Wild card:

California Community Property Creates A Marital Threesome

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3 paper dolls_optSounds kinky, doesn’t it?

Three players in a marriage.

Sharing.

Everything.

Only this is something you can talk about openly, without blushing: community property.

Community property is the default arrangement in California for a married couple.

Yet it is poorly understood by those affected by it and it isn’t inevitable.

How community property works

The community property system provides that everything acquired during marriage is equally owned by the spouses, regardless of which spouse acquired it.

Property owned before marriage or acquired by gift or inheritance is the separate property of the spouse who acquired it.

The most vivid way to imagine the community property system is to see marriage as comprised (for financial issues) of three players:

  • husband,
  • wife, and
  • the community property.

Each of the three may have different exposure to debts.

[ I speak here of the traditional composition of a marital couple, but remember that both same sex couples and registered domestic partners fall under the California community property system. ]

The central concept is that only the person who contracts for a debt is personally liable.

Personal liability will outlast the marriage.  It’s yours, married or not.

The community, however, is liable, regardless of who incurred the debt.

All of the community property is liable for the debts of either spouse.  There’s no halvsies here: no “my half of the community is liable for my debts”.

On money issues, the community is all in.  All the community property is liable for the debts incurred during marriage, regardless of which spouse incurred them.

And that’s not all:  the community property is liable for the debts of either spouse incurred before marriage.

Liable for my spouse’s debts?

You, personally, don’t become liable for your spouse’s debts by reason of living in a community property state.

That means that the credit card company can’t sue you for a debt contracted by your spouse.  So, no judgment against you for his debts.

But a judgment against your spouse can be collected from the community property, including your wages!

Community property can be avoided

Spouses in California are free to agree that they won’t have community property.

That’s what a pre nuptial agreement is often about.  Spouses can agree that their accumulations during marriage will be the separate property of each spouse.

If you are already a married Californian, maybe the three of you want to talk about this.

More

New community property case shakes things up

Community property in bankruptcy

 

 

California Bankruptcy Law Is All Our Own

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california bankruptcy law

California Bankruptcy law is a lot like a unicorn….appealing but imaginary.

Instead, we have bankruptcy in California, where the landscape is shaped by community property;  state exemptions, large mortgages, and the 9th circuit court of appeals.

Like the Merced River cutting through the granite of Yosemite, those factors alter the bankruptcy landscape here.

Community property

California community property law defines what assets of a married couple come within the control of the bankruptcy court. While there are other community property states, it is the law of each state that defines how community property is created.  State law also defines the rights of creditors in that community property.

Whether one spouses files, or both join in a bankruptcy case, all of the community is available to the creditors of the marriage.

In return, after the bankruptcy all community property is forever protected by the discharge.   Post bankruptcy wages and purchases are beyond the reach of creditors.

Even when only one spouse files, all the community gets protection from creditors who had claims when the case was filed.

Much different from the treatment of marital property other places.

Two California exemption laws

While bankruptcy is federal law, California state law defines  exemptions.  Exemptions specify assets a debtor can protect from creditors in bankruptcy.

Exemptions are the only place in bankruptcy that the law is explicitly different from state to state.

Congress, in a legislative compromise in 1978 on the adoption of the Bankruptcy Code (back when Congress knew how to compromise), states were given the option to opt out of the federal bankruptcy exemptions in favor of the state’s exemptions.

In response, California’s legislature gave debtors a choice:  the existing state law exemptions found in Code of Civil Procedure 704, or a special set of California bankruptcy exemptions starting at CCP 703.140.

Mortgage debt dominates

California boasts (or suffers) home loan balances that make eyes bug in other states.  The cost of housing here skews family budgets, leaving less for other living expenses.

For many years, credit cards were used to fill the gap between the available income and the expectations of comfortable living.

For homeowners, the deduction for mortgage payments on the means test assures most homeowners that they pass the means test.

The increasing cost of renting has sharpened the drive to save a house from foreclosure, at whatever cost.

Bankruptcy can often make that possible in Chapter 13.

9th Circuit shapes us

California bankruptcy judges are bound by the decisions of the 9th Circuit Court of Appeals.  The circuit courts can only be overruled by the Supreme Court.

So, the decisions made by the 9th Circuit on bankruptcy issues drive outcomes that are different from outcomes in other circuits.

Recently the 9th Circuit made some very satisfying decisions for bankruptcy debtors, including allowing lien stripping in Chapter 20;  granting attorneys fees to debtors who win bankruptcy disputes with their creditors; and slapping down bankruptcy trustees who sought to disqualify Chapter 13 debtors who had secured debts for non essentials.

And, the 9th Circuit rejected its earlier, horrible decision about making debtors whole when creditors violate the automatic stay.

Bankruptcy the product of our environment

So, sorry to disappoint, there is no “California bankruptcy law.”

There’s just the granite of the Bankruptcy Code, fractured, shaped, and worn by the economic and legal realities of California.

And the resulting landscape is generally awesome.

Does Bankruptcy Discharge A Judgment In California?

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591px-Geologic_map_California_opt

Nothing gets a person into a bankruptcy lawyer’s office quicker than being served with a lawsuit.

The prospect of losing a lawsuit and having a judgment entered against them terrifies.

Callers are frantic to see if they can file bankruptcy before judgment is entered.

They worry that once a judgment is entered, their options in bankruptcy vanish.

Not so.

The debt underlying a California judgment remains just as dischargeable as it was before the case was filed.

And,  a judgment in California does not automatically become a lien on the defendant’s property.

It takes another step in California for a money judgment to become a lien.  And as long as there is no lien, the debt is unsecured and  potentially dischargeable in bankruptcy.

Discharge turns on kind of debt

Contrary to what some dishonest debt collectors will tell you, judgments are just as dischargeable in bankruptcy as the underlying debt is.

Whether an unsecured debt can be discharged in bankruptcy looks at  the nature of the debt, not whether a court has ruled on the merits of the claim.

So,

  • Child support is non dischargeable, whether or not there is a judgment.
  • Debts incurred by fraud are non dischargeable in bankruptcy, if the creditor can prove fraud to bankruptcy standards.
  • Credit card debts honestly incurred are dischargeable, judgment or no.

Liens change everything

What does change the dynamic is an abstract of judgment or a notice of judgment lien.

These documents do create a lien on the judgment debtor’s assets.

Recording an abstract of judgment creates a lien on real property in the county in which it is filed.  A notice of judgment filed with the California Secretary of State creates a judgment lien on personal property located in the state.

If the lien cannot be avoided in bankruptcy, the judgment creditor has obtained an advantage.

What my friend Jay Fleischman’s post about civil judgments in New York and their bankruptcy implications points out is the way state law impacts the operation of federal bankruptcy law.

The rights that each party in a bankruptcy case brings to the bankruptcy case originate in state law.

It also demonstrates why lawyers are licensed in each state and why my California law license does not entitle me to practice bankruptcy law in New York.

And why bankruptcy is not a do-it-yourself project.

More

When you’re served with a lawsuit

Three debts bankruptcy doesn’t discharge

Everything you need to know about judgments

Wage garnishment survival guide

Who are the really scary creditors

Image in the public domain, courtesy of Wikimedia.

Collection Suits and Court Dates

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glasses-983947_1280_opt

Those in financial difficulty are frequently not operating at their peak.  I know that.

But for the life of me, I can’t understand how the recipient of a summons and complaint from a California court can read the papers and absorb only that they have a “court date”.

Arghhh!

How California lawsuit works

The basic outline of a law suit is that the creditor files a complaint with the court. The court issues its summons, which validates the complaint and puts the defendant on notice that there is a legal suit pending.

The summons tells the person served plainly that they must file a typewritten answer to the complaint within 30 days of service.  Fail to file an answer and the other side may get a judgment for the relief prayed for, which is usually money.

Served along with the complaint is a notice of case management conference on a given date.  The CMC is well after the date on which the answer is due.

At the case management conference, assuming that an answer has been filed, the court will set deadlines, trial dates, etc.

But none of this scheduling is necessary if the defendant has not contested the complaint by filing an answer.

You must answer

Why is it that a consumer debtor grasps only the date of the case management conference, and absorbs none of the rest of the message that says clearly, in two syllable words, that one must file an answer for there to be anything for a court to decide?

Stress MAKES you stupid

I should have a cassette tape to play to tell clients that the case management conference date is meaningless if you didn’t file an answer.

If you don’t have a defense to the action, that’s fine.  If you agree that you owe the amount of money shown in the prayer of the complaint, there may be no need for an answer and a defense.

Just don’t obsess about a date that means nothing if you didn’t take the time to read the summons and understand that filing an answer is the price of admission to the courthouse.

Lawsuit is a wake-up call

Often, the filing of a lawsuit is just the most dramatic evidence that your finances are scrambled.

Consider whether you spend your energies fighting this one action, or whether you need a more global remedy like bankruptcy.

Bankruptcy and the alternatives

Image courtesy of Pixabay.

New Law Protects Californians From Debt Buyers

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debt tilesZombie debt may have met its match.

California law prohibits a debt buyer from bringing suit on a claim that is barred by the statute of limitations. Civil Code § 1788.56.  That’s been the law since January, 2014.

Up until this law was enacted, a creditor was free to sue on a debt that was older than the statute of limitations.  The burden was on the person sued to claim the protection of the statute.

Too often, the debtor didn’t know that and the collector got a judgment on debt that should have been unenforceable.

No longer, as to purchased, charged-off debt.

And a check of reported appellate cases in California in the five years since shows no cases appealed under this statute.  What it doesn’t tell us is what’s happening at the trial court level.

This statute was intended to deal with the kind of suit where the consumer never answered and the debt-buyer won by default. So there’s not likely to be an easily located record.

There’s more to the law than just a bar to filing suit.

Required information about debt

A debt buyer may not even contact a person about a consumer debt unless the debt buyer has in its possession

  1. Proof that it is the sole owner of the debt
  2. Balance of the debt at charge off and a breakdown of charges added since charge off
  3. Date of default or last payment
  4. Name, address and account number used by the original creditor
  5. Name and address of the account debtor from the original creditor’s records
  6. Name and address of all entities that purchased the debt after charge off

Scope of consumer protection

These new provisions became part of California’s Rosenthal Fair Debt Collection Act.  These additions are to be called the Fair Debt Buying Practices Act.

Effective January 1, 2014, they apply to debt bought or sold after that date.  At first, you may be left to guess whether a debt buyer calling about old debt is subject to these restrictions.

To be covered by the FDBPA, the debt must be part of a package of charged-off debt.  Old debt that slips into a portfolio of largely claims that have not been charged off is not subject to this act.

That mystery term, charged-off, gets a statutory definition:

"Charged-off consumer debt" means a consumer debt that has
been removed from a creditor's books as an asset and treated as a
loss or expense.

A debt may be charged off of the original creditor’s books and still be legally enforceable, if the statute of limitations hasn’t run.

Courts must demand proof

Another ground breaking provision requires that no judgment be entered, even if the debtor didn’t answer the complaint, unless the collector has supplied a sworn statement as to compliance with the elements of the FDBPA. Civ. Code 1788.60.

The collector must also provide a copy of the contract sued on, authenticated by a sworn statement.

This will be interesting to watch as, often, even the original creditor can’t produce a copy of the contract.  Who will be available to the debt buyer to vouch for the contract? And will the courts monitor robo signed affidavits?  And impose consequences for lying?

Damages for violation

A debt buyer who violates the statute is liable for actual damages caused by the violation, including the amount of any judgment obtained against the individual;  statutory damages of no less than $100 and no more than $1000; and reasonable attorneys fees and the costs of the suit to enforce these rights.

The debt buying trade press forecasts that the California standards will be applied to all portfolios of old debt sold by businesses.  No more, they say, of getting just the account debtor’s name, address, Social Security number, balance and account number on a computer disk.

Brave new world

The Fair Debt Buying Practices Act is a worthy step forward in preventing abuse by purchasers of zombie debt.

I’m particularly encouraged by the provision outlawing filing suit on debt that is time barred.  I hope to see a like provision applied to debts still in the hands of the original creditor.  Otherwise, the application of the statute of limitations are restricted to those individuals savvy enough to file an answer to the suit.

More

Zombie debt

Action plan if you are sued

When discharged debts rise from the dead

Image courtesy of Flickr and Lendingmemo.com

 

Debt Collectors Distort Community Property Law

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distorted lawCalifornia community property law is complicated.

I get it.

It shouldn’t surprise me that debt collectors don’t understand community property.

Or maybe, they find it inconvenient to understand.  Or deliberately distort the law.

Collector expands spousal liability

A client reported that her ex husband had been told by a debt collector that the former marriage made him personally liable for his exwife’s debts.

There must be an emphatic, yet polite, word for b***s****.

Wish I knew the word… “Balderdash” seems so weak.

In my most generous view, this could be debt collectors from outside of California who are clueless about community property law. Or, more realistically, they’ll say whatever they think will scare a payment out of someone.

What California spouses owe

For the record, living in a community property state such as California does not make each spouse personally liable for the contractual debts incurred by their spouse.

If your spouse in California takes out a credit card and runs up a balance, you are not liable to the card issuer for the debt. The community property is liable for the debt, but you are not liable.

Community property law in a nutshell

During the marriage, property that a married couple acquires is presumed to be community property.  That community property includes your earnings as well as those of your spouse.

It may feel like community property law makes you personally liable, but the liability doesn’t follow you out of the marriage.

Death, divorce or a post post nuptial agreement with your spouse not to have community property ends whatever exposure you, personally, have for your spouse’s debts.

If there is no community property, then only the person who contracted the debt is liable for it.

Don’t take legal advice from debt collectors

My client’s encounter with the all-knowing debt collector is all too typical of collectors.

This is but one of the “whoppers” told by debt collectors.

Engage skepticism when dealing with this breed.

Or take notes, and check out the requirement that collectors tell the truth found in the Fair Debt Collection Practices Act and California’s Rosenthal Act.

More

Make debt collectors pay you

How debt collector nearly cost elders their home

When filing bankruptcy is the right move

 

What Are Your Rights In A California Foreclosure

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Foreclosure AuctionThe old saw about Oakland, California is that there is no “there” there.

I suggest it’s the same about being “in foreclosure”:  foreclosure is not a place, it’s a path.

Nothing legally meaningful changes until you get to a foreclosure sale.  Everything before that is prelude.

Yet several  Bay Area clients have asked whether they can remove personal property from their home while it’s “in foreclosure”.

Another client wanted to know what the rights of the foreclosing creditor were to come into her home before any sale was held.

Another thought he needed to vacate the house before the sale.

Your rights to the property remain the same,  unchanged by any default on the mortgage payment.

Rules of California foreclosure

Be clear:  it’s your property until there is a foreclosure sale.

Likewise, the lender is still an outsider unless and until it obtains title to the property by being the highest bidder at the foreclosure sale.

So, certainly you can remove personal property from your home, and, no, neither the lender nor anyone else can come on your property without your permission.

Debt changes your thought process

I’m fascinated by the concept of being “in foreclosure”.  It seems to be akin to being  “in collections”.

Neither are real places, or even changes in your legal rights.

Nicholas_Owen_in_the_manaclesYet laymen seem to think of them as situations in which the rules change and consequences follow. [ I have a mental image of them being dank dungeons with manacles on the wall, and cobwebs hanging from the beams.]

True, each represents a process that may lead to a change in legal rights, or a loss of property, but they are roadways, not fixed “places.”

The foreclosure process, which by California law, takes a minimum of  four months from formal notice of default to foreclosure sale, is being drawn out these days,  by the action or inaction of the foreclosing creditor.

The Homeowner’s Bill of Rights makes dual tracking illegal;  modification processes abound.

Don’t leave before it’s final

Which brings me to my current favorite sermon:  even if it’s inevitable that you lose the house to foreclosure, stay in the property and live payment-free until there is actually a sale.

You may be astounded at how long that interval is, how very much longer than the four month legal process.  Build up some savings to make your move.

How long does California foreclosure really take?

The foreclosure that was longer than War and Peace

More on walking away from a house you can’t save

HBOR

First image courtesy Colleen Lane;  woodcut of torture of Nicholas Owen courtesy of Wikimedia.

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Suite 403
Redwood City, CA 94063
Phone: (650) 694-4700

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