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.
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.
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?