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?
Image courtesy of Openclipart.com
