Delay dividing property in your California divorce and a bankruptcy filing may cost you any shred of control over the division.
All it takes is for your ex-spouse to file bankruptcy, and all the assets and the debts of the marriage become entangled in a bankruptcy case.
That’s because your assets from before separation are community property until they aren’t.
Only a marital settlement agreement or a final judgment as to property issues changes the character of community property into the separate property of each spouse.
And if one spouse files bankruptcy owning an interest in community property, a bankruptcy trustee gets to administer all of the community property.
California law says assets are community property until the division in a dissolution is final. Federal law says if it’s community property, it’s all available to creditors in the bankruptcy of either ex spouse.
So, you see the issue.
Community property in bankruptcy
The longer the property goes undivided, the greater the chance that either spite, frustration, or intervening events will prompt your ex to seek bankruptcy relief.
Then, instead of dividing the assets, and sorting debts for payment by one spouse or the other in the divorce, all the assets and debts can be swept up into bankruptcy. Assets sold, capital gains taxes paid, creditors paid on the spot, and the costs of the bankruptcy trustee’s work paid for from the community property.
Whatever property is exempt or abandoned by the trustee is returned to the debtor and can thereafter be divided as part of the divorce.
So, put off the difficult work of divvying up stuff, and you risk your ex filing bankruptcy and creditors getting all the assets.
Once it’s no longer community, it’s liable only for your debts and any debts assigned to you in the divorce.
So buckle down and work out how to divided property in your divorce at the earliest opportunity, and keep the bankruptcy system away from the assets of your marriage.