Psst!

Let me tell you a secret about bankruptcy law.

You can get 3/4 of the benefits of a bankruptcy discharge without ever going near a bankruptcy court if you are a married person in California, or any other community property state.

If your spouse files bankruptcy and you don’t join in, you still reap much of the protection from your creditors that you would get if you had filed.

How can that be?

It’s the law,  a little known feature of the bankruptcy code that applies to a bankruptcy discharge in a community property state.  §523(a)(5)

Here’s how and why it works this way.

When only one spouse files

Spouses aren’t required to file bankruptcy together.  They can file together, but they don’t have to.

But even if only one spouse files, all of the community property of the marriage becomes property of the bankruptcy estate.

In return, the community property gets a bankruptcy discharge, just as though it was a separate person.  (Which is why I sometimes  say that, in a community property state, each marriage is a menage a trois.)

The discharge protects not only the property that the couple owned when one spouse filed bankruptcy, it protects community property that they acquire in the future.

The creditors who are affected are the creditors who had claims against the community property when the bankruptcy was filed.  Not just creditors of the debtor, the person who filed bankruptcy.   The creditor’s claim could be one against the non-filing spouse, and the discharge protects the non filer’s community property.

It doesn’t surprise us that the spouse who elects bankruptcy is protected.  What is mind blowing is that the creditors of the non filer are equally barred, after the discharge, from reaching the couple’s community property on account of the non filer’s debts.

Post bankruptcy wages are immune

It’s worth repeating this because 1) it’s so important, and 2) it is so hard for creditors to grasp:

the paycheck of the married person is protected from garnishment for that person’s own debts incurred before the bankruptcy,  for all time during the marriage, by reason of their spouse’s bankruptcy discharge.

For most couples, their paychecks are their most important asset outside their homes.  Paychecks are the most easily garnished by a creditor with a judgment.

And the community property discharge protects those wages for so long as there is a marital community.

What is left for creditors of non filer

A legitimate creditor of a non filing spouse, after a bankruptcy discharge, can effectively only enforce its debt against the separate property of the non filer.

Separate property in California includes

• acquired before marriage
• acquired by gift during marriage
• inherited during marriage

The community ceases to exist at divorce or death.  Whatever a spouse is awarded in the division of property is that person’s separate property.

So, after divorce, the non filer’s separate property could be vulnerable to claims that were discharged against the community, assuming that the passage of time hasn’t invoked the statute of limitations on collection suits.

The community property discharge doesn’t prevent a creditor from suing the spouse who didn’t file bankruptcy.  It just limits the assets from which that debt can be collected.

So your creditors can only collect what you owe them from your separate property, if you have any.

Pretty neat, eh?

More

When the bankruptcy trustee asks about your missing spouse

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Being served with papers in a collection suit doesn’t generally help your critical thinking process.

In fact, that surge of adrenaline seems to blur the eyes and fog the brain.

So when you scan the lawsuit papers and see a date, months down the road, you exhale and set the problem aside for another day.

Serious mistake.

The date you picked out is the date set for a case management conference in the California Superior Court.

That date is long after you need to act to protect yourself.

Answer or lose on the spot

Your answer to the complaint is due 30 days after you are served.

No date is typed out because the clerk issuing the California summons can’t know when you’ll be served with the complaint.

The summons form has a summary of what you have to do to defend yourself printed right on its face.

Here’s a blank California summons.

What your answer does

The case management conference is only meaningful if you’ve filed an answer and laid out what’s in dispute in the lawsuit.

• Are you really the person who owes the money?
• Have they calculated the debt correctly?
• Has the statute of limitations passed?

If you file an answer to the complaint that sets out your side of the story, a judge will hold a trial if necessary to determine the truth of the matter.

Court date is only housekeeping

The case management conference, the date that appears in the papers, is the judge’s first look at the case.  It’s a time to assess what the issues for trial are, how soon the case will be ready, and what motions might be required.

It does no good to appear at the case management conference, expecting to argue the case if you haven’t filed an answer, in writing, and served it on the plaintiff who filed the case.

Been served?

Sit down and read the papers, line for line.

The California courts have an online help center for people without a lawyer.

If you can’t bring yourself to read it, see a lawyer who can assess the situation.  Here’s a list of bar association referral panels in California.

Maybe you want to answer;  maybe you concede the debt, and want to pay.  Maybe it’s time to consider bankruptcy.

But whatever your approach, don’t wait til the date on the papers to take action.  It may well be too late.

More

 What to do when you are sued.

Understanding judgments

Is it too late for bankruptcy?

Should you pay up or file bankruptcy

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