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When Your Bank Account Is Seized: California Action Plan

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bank levyTime is short when you get a notice that a creditor has levied your bank account.

California has protections that may allow you to recover money that’s been seized.

But success in getting your money back depends on prompt action and following the procedures.

Bank levy basics

A creditor with a judgment is entitled to levy your bank account to collect the money you owe.

All about judgments

You have an offsetting right to keep some money by claiming exemptions.

A levy only catches the money that is in your account when the levy is served.  It doesn’t affect money deposited to the account later.

Your bank has few choices when a levy is served.  By law, it must hold the money in the account on the day the levy is served for the creditor.

And it must deliver to you a notice of the levy and information about your rights to claim exemptions.

What you can keep

Let’s assume that the money in the levied bank account consists of your wages.

California exemption law protects a minimum of 75% of take home pay.  A non-support creditor simply can’t reach the 75% that is exempt. Cal. Code of Civil Procedure 704.070.

If your wages were already garnished before they were paid to you, what you take home is exempt from further levy.

And, you may be able to protect more than 75% of your wages if you show that you need more than 75% to provide for yourself and your family.

California law grants absolute protection to the assets of and distributions from private retirement plans and retirement-focused profit sharing plans.  CCP 704.115.

Public retirement benefits are also exempt.  CCP 704.110.

Federal law protects Social Security.

Claiming funds exempt

Here’s what you need to do to contest the levy.

When a bank account is levied,  CCP 700.010 requires the levying officer to serve on the judgment debtor these documents:

  • the writ of execution (issued by the court)
  • a notice of the levy
  • a list of exemptions prepared by the Judicial Council

The last item, the list of exemptions, is your key to regaining some part of the bank balance if they are traceable to wages.

The notice of levy contains the critical instructions and the time line:

To claim an exemption, you complete the Claim of Exemption form and give it to the levying officer, typically the sheriff.  If you contend that the levied money is necessary for your support and for the support of your dependents, you also complete the Financial Statement.

The judgment creditor then has a choice.  It can agree that the levied funds are exempt and they are returned to you.  Or, the judgment creditor can set a hearing before a judge to challenge your claim of exemption.

Serve papers on time

The burden is on you as the judgment debtor to complete your clams of exemption and get them back to the levying officer on time.

A successful claim of exemption protects your funds from this levy.  While it may give the creditor some visibility into your finance, it doesn’t solve the bigger problem created by the judgment.

Consider consulting with a credit counseling agency or a bankruptcy lawyer to assess the bigger picture of your finances.  Even if the creditor has a judgment, the debt may still be dischargeable in bankruptcy.

More

Collection lawsuits in California

Property safe from creditors under California law

Myths about bankruptcy

Image © vladimirfloyd

California Homestead Exemption: The Truth Isn’t What You Think

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patchwork

“They can’t take my house, whatever happens.  Right?”

The young man in my office “knew” that the substantial equity in his home was exempt as a California homestead, even if he filed bankruptcy.

He “knew” that credit card debt was dischargeable.

And that “knowledge” lead to his conviction that , in bankruptcy, he could keep the house and ditch the credit card debt without payment.

Wrong.

In his mind, bits of legal truth got stitched together into a bankruptcy myth.  Let’s piece together the truth.

California homestead

True:  every California homeowner can claim a homestead in their principal residence.  CCP 704.720

But:  the homestead is limited to a certain amount of value.  For the single guy sitting across my desk, that amount was $75,000.  Equity in his condo in excess of that isn’t protected by the homestead.

Worse, the homestead is only effective against certain kinds of creditors.  The tax liens that were of record for old tax years aren’t defeated by a state law homestead.   So the tax liens remain enforceable. *

Credit card debt is dischargeable

True:  unsecured credit card debt (not incurred by fraud) can be wiped out in bankruptcy.

But: the discharge speaks to whether the debt survives the bankruptcy and is enforceable afterwards.  Being dischargeable doesn’t mean that creditors don’t share in the bankruptcy distribution.

Asset value matters in bankruptcy

True:  every debtor can claim exemptions that protect the exempt amount from being paid out to creditors in the bankruptcy case.

But:  the asset value not protected by an exemption is available to pay the claims of creditors, as far as that value goes.  For most unsecured creditors, all they get from the debtor is their pro rata share of the non exempt property of the estate.   Any unpaid balance is discharged.

Bankruptcy truths

So when the bits of the law my client got right are expanded and seen as a whole,  any bankruptcy discharge was unlikely to result in paying less to his creditors. His house represented far more value than the debts, dischargeable and non dischargeable, that he owed.

Likely, in either Chapter 7 or Chapter 13, his creditors would get 100% of their claims.  In my view, any amount he might save in reducing the interest accruing on those claims to the bankruptcy interest rate would be eaten up by the legal fees to file the case, and the credit hit he would incur.

True story of huge savings on credit card debt

The one critical bankruptcy advantage might be the power of the automatic stay:  if the mortgage lender threatened a foreclosure before he could cure the secured arrears, bankruptcy could stop foreclosure long enough to either propose a Chapter 13 plan, or arrange family help to keep the house.

* In Chapter 13, the homeowner could strip a tax lien down to the value of the home after all senior liens were subtracted.  The stripped down lien would have to be paid in full through the plan.  The balance of the tax lien would be treated as an unsecured claim.

More

Bankruptcy myths abound

Everything you need to know about the California homestead exemption

Who gets paid first in bankruptcy

 

 

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 property 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.  It retains that separate property character as long as it isn’t comingled with community property.

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.

Both same sex couples and registered domestic partners fall under the California community property system

Only the person who contracts for a debt is personally liable.

That personal liability will outlast the marriage.  It’s your responsibility, whatever your marital status.

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.

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 don’t become personally 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! But it can’t be collected from your separate property.

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

 

 

File Bankruptcy And Leave A Legacy

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Elders in California enjoy enhanced state exemptions that protect them from debt collectors.

Those protections often make it unnecessary for a debt-laden senior to file bankruptcy.

But no one talks about one consequence of relying on exemption law to fend off creditors.

California exemption laws that  fully protect the assets of seniors provide no protection to the heirs.

The elder who elects to rely on state law exemptions during his lifetime may be leaving his estate , in effect, to his creditors.

Probate pays creditors

Probate is a proceeding to assure that the property of the decedent (the person who has passed away) goes to the correct parties.

Payment of the decedent’s debts comes before payment to heirs.

In probate, creditors have a short period to file their claims.

Once the allowed claims are paid, the heirs have no liability to the decedent’s creditors, even those who didn’t file a claim.

Exemptions in probate

Probate law provides for a homestead exemption, giving the surviving spouse and any minor children a place to live.  Cal. Probate C. 6520 and following.

The protection of the probate homestead lasts only as long as the probate administration and the property remains liable for the debts of the debtor.  Probate C. 6526.

The probate court can likewise set aside other assets for payment of a family allowance for a surviving spouse, minor children and adult children who are incapacitated and dependent on the decedent.

The family allowance also ends with the final order in the probate.

Revocable trusts expose heirs

The revocable trust, or living trust, is a popular way around the expense and delay of probate.  But it comes with a little discussed exposure to creditors.

When the trustor (the person who creates the trust) dies, the assets of the trust are distributed by the successor trustee as the document provides.  No probate is required for trust assets.

But, unless the successor trustee opens a court proceeding to administer the trust estate and gives notice to creditors, any gift to heirs from the trust comes with personal liability for the debts of the decedent.  Probate C. 19400.  That liability is capped by the amount of the gift.

Creditors have one year from the death of the trustor to file suit against the heirs to collect the debt.  Cal. C. Civ. Pro. 366.2.

Ouch!

Bankruptcy eliminates the debts

If the senior elects during his lifetime to file a bankruptcy case,  he can use the generous bankruptcy exemptions available to Californians to protect the assets he has, including up to $175,000 in equity in his residence.

Most unsecured debts are wiped out for all time.  Any accumulations after bankruptcy are free from the claims of the pre bankruptcy creditors.

And, at the senior’s passing, discharged creditors  have no claim against the estate or the trust heirs.  Whatever assets the senior has flow to those of his choosing, rather than the creditors eliminated in bankruptcy.

That point, alone, might tip the scales in favor of a bankruptcy filing even for the collection-proof senior.

More

Exemptions at work

More about homesteads

Going to court in your bankruptcy case.

 

Debt Collectors Distort Community Property Law

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distorted law

Debt collectors claim you are personally liable for your spouse, or ex-spouse’s, debts.

That’s a (convenient) lie.

California 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 maybe, they 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.  That includes the community property that you’ve earned.

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 here’s the distinction.  That 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 the community had 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

 

Title Isn’t Everything: Watch Out For The Assets In Your Spouse’s Name

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community property surprise

But it belongs to my spouse, sputtered the hapless debtor at the bankruptcy hearing.

Not so, says the bankruptcy trustee.  It was purchased during marriage, wasn’t it?

And so, the trouble begins for those who don’t understand community property.

Turns out the debtor left out of his schedules the bank account in his wife’s name.  Ooops!

Which motivates a trustee to keep digging for what else was left out of the bankruptcy papers.  Not where you want to be.

Property character, community or separate, makes a difference because it determines what assets creditors of the spouses can reach.  And, it determines what property falls under the control of a bankruptcy trustee.

All of the community property of a marriage becomes property of the estate when one spouse files bankruptcy.

So the community or separate distinction matters not just in divorce, but it matters to those Californians who owe debts they can’t pay.

Property title doesn’t control

In a nutshell, if you are a married Californian, it doesn’t matter whose name is on the title.

  • Buy a car.
  • Buy a house.
  • Take out an insurance policy

No matter whose name is on the paper work, chances are it’s still community property of you and your spouse.

Because “stuff” acquired during marriage is presumed to be community property under California law.

A presumption in law means  legal inference that must be made in light of certain facts.  Most presumptions are rebuttable, meaning that they are rejected if proven to be false or at least thrown into sufficient doubt by the evidence.  

The legal inference that acquisitions during marriage are community can be rebutted with sufficient and convincing evidence.  But absent such evidence, the presumption of community stands.

So, the house bought during marriage whose title reads Jane Spouse is community property, not Jane’s separate property.  That means that Jim Spouse’s creditors can reach it to pay Jim’s debts.

Magic words make a difference

The words in the title documents can themselves be evidence of an asset’s character.

If you want an asset acquired during marriage to be the separate property of one spouse, the first step in overcoming the presumption of community is to take title like this:

Jane Spouse, a married woman as her sole and separate property

But courts have made it more difficult, because what if Jane buys something using community property and takes title as her separate property.  Maybe she’s trying to cheat her spouse out of his share of the community that was used to buy the asset.  If she bought it, how does a creditor or a bankruptcy trustee know that Jim Spouse agrees that it’s hers alone?

Changing the character of an asset is called transmutation.  California law requires transmutation to be accomplished in a writing, signed by both spouses.  Then others know that the deviation from the usual is OK with Jim.

Prenuptial agreement can kill community property

An agreement between the spouses made before marriage (a “prenuptial” agreement) defeats the presumption.

A prenuptial agreement often says “we won’t have community property”.  The agreement lays out who is the owner of each kind of asset.  It may reject the legal cases that give the community an interest in property that either spouse brings to the marriage.

Because a properly drafted prenuptial agreement is in writing and signed by the spouses, it passes muster to rebut the presumption of community property.

Then, title plus the prenuptial beats the community property presumption.

Image courtesy of Flickr  & Nathan Pilkington 

 

Get A Voodoo Discharge Without Filing Bankruptcy

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Magic_flame_(9753202092)_opt

One of the great mysteries of debtor/creditor law is the community property discharge in bankruptcy.

When only one spouse files bankruptcy in a community property state like California, the non filing spouse reaps bunches of benefits that creditors can’t imagine.

Benefits that aren’t explicitly described in books about bankruptcy or understood by creditors.

Those benefits start with the non filer’s wages being absolutely protected after bankruptcy from that person’s debts existing when the case was filed.

How can that be? frustrated creditors shriek.

It’s community property law, is the reply.

The   phantom discharge works like this.

When one spouse files bankruptcy

File bankruptcy in a community property state and all of a couple’s community property becomes property of the estate.  And, all of the creditors who have claims that can be collected from the community property are creditors in the bankruptcy case.

So, if Jane files bankruptcy, and her husband Joe does not join the case, Joe’s creditors who have a claim on the couple’s community property can participate in the case.

All creditors of either spouse can collect their claim from community property.

I say “can“, but that’s a stretch.  Joe’s creditor doesn’t really get a choice about whether they are affected  by Jane’s bankruptcy.  If they get notice of the bankruptcy filing, they are bound by the outcome of the case.

At the end of Jane’s bankruptcy, her discharge eliminates all of  her liability for her dischargeable debts.  And the discharge eliminates any claim that listed creditors of Joe have to the couple’s community property.

Jane’s discharge protects not only the couple’s community property that exists when the bankruptcy is filed.  It also protects any community property that they acquire any time in the future.

So, Joe’s creditors are really hamstrung.  Their claims can only be collected in the future from Joe’s separate property.

Magic.

Good magic if you are Joe;  bad magic if you are Joe’s creditor.

What the discharge doesn’t do

While the community property discharge limits what Joe’s creditors can do, the discharge does not wipe out Joe’s personal liability for his debts.

He still owes the debts.  Those debts can be collected from any separate property he has.  That separate property might be

  • assets he had before marriage;
  •  wealth he inherits; or
  • gifts he receives.

If Joe doesn’t pay on the debts for which he is liable, his creditors can still sue him.

They can get a judgment.  They can haul him in for a debtor’s examination.

They can report the debt as delinquent.

They just can’t levy, lien or garnish his wages or other assets he and Jane acquire as community property.

It can get messy.

Since it’s only the community property of the marriage that is protected by Jane’s discharge, the protection doesn’t survive the end of the marriage, either.

If Joe is widowed or divorces, his earnings become separate property.

A nasty quirk is that any community property that Joe acquires in a new marriage is liable for the debts he has that preexist the new relationship.  Ouch.

Reasons not to file bankruptcy

Often, one spouse opts not to join in a bankruptcy because of employment concerns, either a position where bankruptcy seems inconsistent with the job description.

Or the debts in that spouse’s name are fewer.

Or they hope to hold on to a credit card that is important for work.

Or the couple hopes to use the non filer’s credit for some important purpose in the near term.

The household finances will be greatly improved by eliminating the creditors who can garnish the community property.

Each person is supposed to have their own file with the credit reporting agencies.  Thus a bankruptcy of your spouse should only be noted on your credit report if you had joint debt.

The take-away here is that the post bankruptcy terrain for a married couple where only one files for bankruptcy is uneven.

How well the community property discharge works depends on what the non filer hoped to achieve by not filing.

More on community property

Principles of  California community property

Dates, mates and debt

Bankruptcy and the division of community property in divorce

Bankruptcy terms, simplified

Image courtesy of wikimedia.

Collection Law Suits in California

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lawsuit

A prospective bankruptcy client often arrives in my office because a creditor is hot on their heels.

They’ve been sued for debt and they are panicked about the consequences.

Almost invariably, the client has leapt to two incorrect assumptions:

  1.  the world as they know it is coming to an end; and
  2.  they don’t have to do anything until the date set for the case management conference, months down the road.

Wrong on both counts.

Judgments take time

The filing of a lawsuit is a step toward a legal judgment in favor of the creditor. A judgment is a determination that the debtor owes the amount of the debt and usually the creditor’s expenses to get the judgment.

A judgment entitles the judgment creditor to enlist the coercive power of the state to collect that judgment by levy, lien or garnishment.

All about California judgments

Judgment liens

A judgment in California does not automatically constitute a lien on the debtor’s assets, as it does in some states.

In California, a creditor with a judgment must take an additional step to create a judgment lien.

A judgment lien on real estate is created when an abstract of judgment, issued by the court after entry of judgment, is recorded in the records of the county recorder.

A judgment lien on personal property is created by filing a notice of judgment with the Secretary of State.

A judgment lien allows a creditor to execute on that lien through the courts. In that process, even outside of bankruptcy, the judgment debtor may claim an exemption in certain kinds of property.

Understanding exemptions.

In short, getting a judgment is just a step toward actually taking something from the judgment debtor. All these steps take time and cost the creditor something.

Time to consider your options

The filing of a lawsuit may be a good indicator that you need to do something proactive about your financial situation but it is not an emergency.

About that second assumption, that you don’t need to act before the court date, you must read this.

More

California judgments are dischargeable in bankruptcy

Avoiding liens in bankruptcy

Do you need to file bankruptcy

What’s the difference between a good bankruptcy lawyer and a great one?

 

Collection Suits and Court Dates

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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.

Why Even Rock Solid Marriages Need A Prenuptial Agreement

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ring-260892_1280_optPre nuptial agreements aren’t just for the rich or  mid-life marriages.

In California, pre nuptial agreements do far more than provide a blueprint for division of property at divorce.

A prenup can earn its keep for decades in marriages where divorce never enters the picture.

Why?

It protects the assets of the marriage from outsiders.

A prenup can limit what assets the creditors of one spouse can reach to satisfy a debt.  Let’s see how that works.

What’s a prenup

A prenuptial agreement is a contract between two parties, made prior to their marriage, that controls the ownership, management, and division upon divorce, of their assets and income.

After the divorce case of San Francisco Giants Barry Bonds testing his prenuptial agreement that denied his wife any part of his earnings during marriage, California prenups must meet a series of tests designed to make sure that the agreement was made knowingly and preferably with advice from a lawyer.

The California Supreme Court upheld the Bonds prenup, even though the wife had no lawyer, was disadvantaged by the agreement and had it popped on her on the eve of the wedding. That decision sparked changes to the law  to make more certain that both parties understood the arrangement and its consequences.

My interest as a bankruptcy lawyer in prenups is rooted in how a pre nup works during the marriage.

A prenup’s value lies in overriding the California  presumption that everything acquired during marriage is community property.

Community property is vulnerable

Community property is liable for the debts of either spouse incurred during the marriage.

Any debt.  Whether the other spouse knows about it or not.

Worse, the community property is liable for the debts of either spouse that they incurred before marriage.

In the absence of an enforceable agreement, California law makes everything acquired during marriage community property, including the wages of each spouse.

The result is that one spouse can find their wages garnished to pay a judgment their mate without any involvement from the spouse whose wages are garnished.  Ouch.

Cut exposure in half

Too often, the full ramifications of community property and the claims of creditors aren’t obvious until a business deal goes bad, or there’s a horrific accident, or the student loan collectors come round.

Then spouses see that everything they’ve acquired and their income going forward is liable to pay a crushing debt. Or at risk in a bankruptcy.

When giving isn’t a virtue

And often it’s too late to do anything that’s legally effective to move away from community property.  Post nuptial agreements not to have community property are subject to being invalidated as fraudulent transfers.

Fraudulent transfers include disposing of property without getting equivalent value in return , like giving stuff away.  Fraudulent transfer law also applies when you take actions after a debt is incurred that are intended to make it hard for an existing creditor to collect what he’s owed.

If a transfer is fraudulent, a creditor can invalidate it and reach the assets you were trying to insulate.

So, if you wait to reconsider community property until there’s a real need, it may be too late.

Weighing the risk

If you elect to alter the results of the community property system to limit exposure to creditors, you have to live with the consequences should the marriage dissolve.

A California family court has jurisdiction over the community property of the couple, but not over their separate property.  And separate property is what results by reason of a pre nup.

A family judge could still award family support and can also divide the family home even if held as separate property.  But other acquisitions may be beyond the reach of the family court by reason of how title to the asset is held.

So, a prenup is not without its own risks.

Who said marriage is easy?

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

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