Your spouse’s assets can get swept up in your bankruptcy when you live in California.
Because, most likely, just holding an asset in the name of one spouse doesn’t defeat the community property presumption.
I saw it play out in a first meeting of creditors when the bankruptcy trustee asked about an asset.
But it’s titled to my spouse, sputtered the hapless debtor at the bankruptcy hearing. She hasn’t filed bankruptcy.
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.
Community property law is far-reaching
Turns out the debtor left out of his bankruptcy papers the bank account in his wife’s name. Ooops!
Finding that omission motivates a trustee to keep digging for what else was left out of the schedules. 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. Bankruptcy Code 541(a)(2).
So the community or separate property 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 beats 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. And the asset doesn’t come into the bankruptcy estate of the other spouse.
Image courtesy of Flickr & Nathan Pilkington