Bankruptcy Gets All The Community Property

I cringe when a client says that they’ve researched bankruptcy on the internet before coming to see me.

For every sound, balanced, nuanced article on consumers and their debts, there are bunches of sloppy, inaccurate sites, often trying to make bankruptcy so frightening that you’ll buy whatever they’re selling.

But when a group of bankruptcy lawyers, trying, I’d assume, to provide useful information on bankruptcy get it so wrong, I’m perplexed.

Bankruptcy Home, which identifies itself as a group advertising site for bankruptcy lawyers, has community property absolutely wrong. At least California community property, which is all I’m licensed to deal with.

When one spouse in a community property state files bankruptcy, the site says, the debtor must include the value of one half of the community property. Wrong, wrong, wrong!

I don’t know whether these lawyers haven’t read the bankruptcy code or haven’t read the site that they pay for. Neither alternative is flattering to them.

All Community Property Comes In

Here’s what section 541 of the bankruptcy code says:

(a) The commencement of a case …creates an estate. Such estate is comprised of all the following property…

(2) All interests of the debtor and the debtor’s spouse in community property as of the commencement of the case that is—

(A) under the sole, equal, or joint management and control of the debtor; or

(B) liable for an allowable claim against the debtor, or for both an allowable claim against the debtor and an allowable claim against the debtor’s spouse, to the extent that such interest is so liable.

So, while the spouses may each get one half of the community property upon divorce, in bankruptcy, all of the community property comes into the estate.

In exchange for bringing all of the community property into the bankruptcy estate, all of the prefiling community claims are discharged and the non filing spouse’s interest in future community property is protected from pre filing community claims. We call that the community property discharge.

I know it’s complex, but the complexity of community property doesn’t lie in what comes into the estate, as stated by Bankruptcy Home. To be credible, bankruptcy lawyers need to get the basics right, and to acknowledge that there are further complexities.