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

By Cathy Moran

community property surprise

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.

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 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.

More

What you need to know about community property

Brace decision upends characterization of property acquired during marriage

Image courtesy of Flickr  & Nathan Pilkington 

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Filed Under: Strictly California Tagged With: 2016, California

About Cathy Moran

I'm a veteran bankruptcy lawyer and consumer advocate in California's Silicon Valley. I write, teach, and speak in the hopes of expanding understanding of how bankruptcy can make life better in a family's future.

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Soapbox is a companion site to Bankruptcy in Brief, where I try to be largely explanatory and even handed (Note I said “try”).

Here, I allow myself to tell stories and express strong opinions. We dig deeper into how to consider bankruptcy and navigate a bankruptcy case.

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