community property Archives - Northern California Bankruptcy Lawyer

Get A Voodoo Discharge Without Filing Bankruptcy

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.

Why Even Rock Solid Marriages Need A Prenuptial Agreement

By Cathy Moran

Pre 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?

California Community Property Creates A Marital Threesome

By Cathy Moran

Sounds 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 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.

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.

[ I speak here of the traditional composition of a marital couple, but remember that both same sex couples and registered domestic partners fall under the California community property system. ]

The central concept is that only the person who contracts for a debt is personally liable.

Personal liability will outlast the marriage. It’s yours, married or not.

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. All the community property is liable for the debts incurred during marriage, regardless of which spouse incurred them.

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, personally, don’t become 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!

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.

New community property case shakes things up

Community property in bankruptcy