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Why Even Rock Solid Marriages Need A Prenuptial Agreement

By Cathy Moran

ring-260892_1280_optWe think about a pre nuptial agreement as protection or direction if a couple later divorces.

It can be far more than that.

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.  Changes to the law resulted to make more certain that both parties understood the arrangement and its consequences.

My interest in prenups looks at how it 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.

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’s probably 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?

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Filed Under: Featured

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.

About The Soapbox

You've arrived at the Bankruptcy Soapbox, a resource of bankruptcy information and consumer law.

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 on how I think law should work for the consumer and small businesses when it comes to debt.

Moran Law Group
Bankruptcy specialists for individuals and small businesses in the San Francisco Bay Area

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