Community Property States

[Pizza]

He had minimal (maybe $4-5000) and most of my debt was incurred during my previous marriage but still we were worried about the hassle of creditors trying to collect and us having to prove he wasn't responsible. Was just about peace of mind.

So the two of you got rid of a little extra debt then, which is good for both of you. In my situation, my wife owes nothing, nada, that can be discharged in BK, just student loans and we are both on the mortgage. So the concern is, oh say, the car catches on fire and we need to replace it, and both of our credit reports are trashed because we had to file jointly... see what I'm saying?

[CindyLou]

He had minimal (maybe $4-5000) and most of my debt was incurred during my previous marriage but still we were worried about the hassle of creditors trying to collect and us having to prove he wasn't responsible. Was just about peace of mind.

[Pizza]

We included my husband on the BK because it didn't cost anymore to add him and we wanted to be over and done with it and never have to deal with creditors trying to collect. I am happy we made that decision. I felt he was MORE vunerable living in a community property state than if we weren't!

Did he have any bad debts? That's what this is all about, really, forcing a responsible person into debt because of what their significant other did... I got some more responses from lawyers and it really doesn't seem like there is a black and white answer anywhere... a game of chance?

[CindyLou]

We included my husband on the BK because it didn't cost anymore to add him and we wanted to be over and done with it and never have to deal with creditors trying to collect. I am happy we made that decision. I felt he was MORE vunerable living in a community property state than if we weren't!

[optimistic1]

Most creditors dont even know what the hell a community property state really means, once you discharge all the debt, they rarely would try to bother the non-filing spouse, thats what the state certified bankruptcy attorney told me once.

[Pizza]

Clarification, and I'm sorry for any misleading information...

I wanted to go back and edit those two posts because after further research, I'm not as sure as I thought about the issue. Don't take them as advice, I may be entirely wrong.

I have actually asked some attorneys about the community property laws and the laws are not well-defined enough for even the attorneys to give an absolute answer. You CAN file separately in any state (which I don't understand the reasoning behind that if this is such a serious issue), but I would suggest asking SEVERAL attorneys about it first and using all the CYA you can.

If you want to file without your spouse and you feel there is good reason to, I would first suggest that your non-filing spouse thoroughly inspects all three credit reports. If there are any 'authorized user' card accounts, call the bank and have your spouse removed immediately, and have the spouse dispute all the items with each reporting agency. There is no law against removal of an authorized user, and there is 'supposedly' no liability for the debt. Honestly, it doesn't seem that the credit card companies get it either, because there were no problems removing the few that my wife had listed.

By clearing the reports of the accounts, at least it would make it less likely that after the discharge your creditors would have open books on the accounts, and it would also remove the negative information currently impacting the spouse if the balances are currently large or there is derogatory information on them. At least this would soften the blow if a joint petition were filed. The actual impact and the action of creditors, it seems, is based on how EVERYTHING as a whole is reported.

If you have obvious joint or secured debts, they will not be dissolved by your bankruptcy alone, so keep that in mine as well. I will continue to pursue the question with attorneys because it seems like this would be a very common problem with BK in community property states.

The community property and income DEFINITELY are included in the means test, so keep that in mind as you venture off into your BK.

Here are some attorney responses:

Houston Bankruptcy attorney:
"You ALWAYS have the option to file alone, although it may not be wise. The decision to file a joint or single case is complicated (as are most bankruptcy issues).

Although you can always file alone, you must disclose information concerning your community property assets, and your joint income. Your joint income will be considered in determining whether the filing is abusive, regardless of whether your spouse joins in the filing."

California Bankruptcy attorney:

"I'm sorry you haven't received a solid answer, and I'm afraid I'm not going to improve your mood much. The reason is that there simply isn't a definite answer. The best one I can give you is that if you file bankruptcy separately (your wife does not file), then it might affect her credit somewhat, but it will not be shown as a bankruptcy on her credit report. Part of the problem with this is that nobody knows what criteria credit reporting agencies use to make their determinations. Clearly her credit report will not be affected as much (if at all) as if she filed her own bankruptcy case, but there's always a possibility, especially in joint credit situations, that her score may be reduced somewhat. It also may not affect her credit at all, but it would be wrong to point out that there's no chance of it being impacted."

So what are the odds of liability and negative credit impact? I still don't know.

[optimistic1]

If a divorce is final before one spouse files BK Ch 7 in Az....how will the other spouse be effected?

Thanks

By incurring marital debt together, and then divorcing, the other spouse is legally obligated for those marital debts @ 100%, a creditor could sue and win against a divorced spouse in a community property state, the question is would they??

So, in a scenario like that, both divorced spouses would need to file seperate bankruptcies to discharge the debts.

If just one files, the creditors might not even bother suing the other divorced spouse, it just depends, I would have one spouse file and discharge the debt, then wait and see if the creditors try to come after the divorced spouse, and then file as a last resort.

[Pizza]

Correct. Only the non-filing spouse's property acquired before marriage is exempt outside of the traditional exemption methods.

The debt is joint if an account was created in both spouse's names or if there is secured property involved.

[Pizza]

To elaborate a litte:

Let's say two people decided to get married and then they bought a house. Both of them bring their cars, furniture, appliances, etc. from their apartments to the new house. Then one of the spouses decides they need more stuff, so he/she charges up debt on a new TV, new furniture, new appliances, and the couple gets a new car. Later, the spouse who charged up all this stuff loses his/her job and decides to file bankruptcy.

The non-filing spouse's car, furniture, etc. is not part of the estate because it was purchased or received before the marriage. The house, new car, and all the new property is part of the estate because it was part of the marital community. The filing spouse's personal property, before marriage or not, is also part of the estate.

All income from both parties is considered on the means test because it is marital income. However, if the non-filer has nothing to discharge, the bankruptcy wouldn't hit their credit because there is nothing to discharge on their credit report. It's complicated and may cause problems if the non-filer has trouble proving what was purchased before marriage, but by the books, it's not part of the estate.

Now if both spouses have debt, it is ALWAYS best to file jointly, community property state or not (mainly because it's cheaper). But in some cases, it does make more sense for only one to file to avoid the other losing property or taking a credit hit which would leave both debtors with no access to credit for emergencies later in the marriage.

Another thing to be wary of is the non-filing spouse's status as an authorized user. All the bad credit will stay on their credit report unless the filing spouse removes the authorization to use his/her credit card. It is also important for the non-filer to check their credit reports and dispute anything that should have been removed, before AND after the BK.

At least this is the way it works in Ch. 7. Ch. 13 would be tougher because the 'family' budget includes the entire household's income and expenses, so although the credit report could be salvaged, the non-filer would have to participate in the court-ordered repayment plan, which could have negative consequences should he/she decide to charge credit cards if the payment plan doesn't allow for what he/she wants to spend - this could push the non-filer into becoming a filer later AND it could be much more scrutinized by the BK court.

[Pizza]

Texas is one of those community property states, and the guy with the "pill" avatar has quoted stuff I've read several times. If one person owes all the money and the other does not, the filing spouse can still file separately, BUT all the community property acquired after the marriage is part of the estate, as is all household income considered for the means test. I'm not 100%, but this is how I have interpreted all the data.

Now divorce is different. The hypothetical discharge is dissolved in divorce and the non-filer can be held responsible for debts they did not discharge personally (or jointly) because there is no longer marital property or debts, it's a 50/50 split and the non-filer becomes one entity.

I think usually that the sole basis of filing separately is to protect someone's credit and pre-marital assets who does not have enough debts to want to be involved with the BK. Sort of an incentive to keep the marriage alive, IMO.

[lrprn]

If a divorce is final before one spouse files BK Ch 7 in Az....how will the other spouse be effected?

Bellessima, only an experienced bk lawyer working with an experienced divorce lawyer in Arizona can reliably answer your question.

The community property laws vary a bit between each community property state, and the divorce laws are even more variable from state to state. There's no absolute one right answer for every divorcing/divorced couple, no matter where they live and no matter who files first.

Divorce and bankruptcy laws on the state level make for uneasy partners that sometimes can even be in conflict with each other, so expert legal advice is needed to know ahead of time what might happen if one of the couple files bankruptcy before or after the divorce is final.

[bellessima]

I found another link, this one is from Moran Law, a northern California (community property state).

Community property discharge

When one spouse files bankruptcy in a community property state, the marital community enjoys the protection of the filing spouse's bankruptcy discharge. Section 524 of the Bankruptcy Code provides that any community property that the filing spouse and the non filer acquire after the bankrutpcy is protected from creditors of the non filer who held a claim against the non filing spouse as of the date of the filing.

A creditor with a claim against the non filing spouse can only collect its debt from the separate property of the non filing spouse. In California, that separate property is comprised of assets acquired before marriage; assets acquired by gift during marriage; or assets acquired by inheritance.

Creditors, despite the fact that the community property discharge has existed since at least the passage of the Bankruptcy Code in 1978, have a hard time believing that someone in a community property state gets the benefit of their spouse's bankruptcy discharge, but that's the law.

http://www.moranlaw.net/alone.htm

Who we are.

Northern California bankruptcy lawyers
Specialists in bankruptcy law for 29 years, the Moran Law Group concentrates its practice in bankruptcy and related debtor-creditor and tax areas. We represent both creditors and debtors in courts throughout the Northern District of California, including Silicon Valley, San Mateo County and the East Bay.

We offer personalized attention, years of experience, and solutions that are practical and cost effective for individuals, businesses and creditors. Meet the lawyers of the Moran Law Group.

Each member of the staff is dedicated to working as a team to provide clients with the best possible legal service at reasonable cost.

If a divorce is final before one spouse files BK Ch 7 in Az....how will the other spouse be effected?

Thanks

[optimistic1]

I found another link, this one is from Moran Law, a northern California (community property state).

Community property discharge

When one spouse files bankruptcy in a community property state, the marital community enjoys the protection of the filing spouse's bankruptcy discharge. Section 524 of the Bankruptcy Code provides that any community property that the filing spouse and the non filer acquire after the bankrutpcy is protected from creditors of the non filer who held a claim against the non filing spouse as of the date of the filing.

A creditor with a claim against the non filing spouse can only collect its debt from the separate property of the non filing spouse. In California, that separate property is comprised of assets acquired before marriage; assets acquired by gift during marriage; or assets acquired by inheritance.

Creditors, despite the fact that the community property discharge has existed since at least the passage of the Bankruptcy Code in 1978, have a hard time believing that someone in a community property state gets the benefit of their spouse's bankruptcy discharge, but that's the law.

http://www.moranlaw.net/alone.htm

Who we are.

Northern California bankruptcy lawyers
Specialists in bankruptcy law for 29 years, the Moran Law Group concentrates its practice in bankruptcy and related debtor-creditor and tax areas. We represent both creditors and debtors in courts throughout the Northern District of California, including Silicon Valley, San Mateo County and the East Bay.

We offer personalized attention, years of experience, and solutions that are practical and cost effective for individuals, businesses and creditors. Meet the lawyers of the Moran Law Group.

Each member of the staff is dedicated to working as a team to provide clients with the best possible legal service at reasonable cost.

[lrprn]

I hate to disagree with you because you are a moderator...

It is always ok to question anything posted here in the forums no matter who posts it. Thanks for speaking up.

...but I have researched this topic, and had several consults with BK and family law attorneys in my state, which is a community property state.

The key here is "in my state". I'm sure that this is true in your case because of case law precedents already decided in your state. But this doesn't guarantee that it's 100% true in the other community property states across the country.

That's one of the risks here in the forums. Members assume that because something is true for them, true in their local court, or true in their bk district, it's probably true for everyone. Unfortunately it's not.

When filing for bankruptcy in a community property state, the only way to know for certain what to expect in YOUR case in YOUR state is to get expert legal opinions from bk lawyers and property lawyers familiar wish the ins and outs of who is liable for marital debt when a bankruptcy is filed.

[optimistic1]

Correct, that would be the case if you filed under a Ch.13 or a Ch.7, in all honesty the trustee doesnt want peoples junk, no offense, and non-exempt asset's sometimes are worth much more than junk. So, you can pay the trustee the value of the item as determined that it is over the exemption, and keep it. But that is where it gets tricky, because you can't necessarily have cash on hand to pay for it, because your only allowed so much cash. Once you consult a good BK attorney, he can tell you about the inner workings of the Chapter 7 trustee's and how they handle non-exempt assets. In a 13, you would keep it regardless, but you would have to pay what it is worth into your plan so your creditors can get some money.

Yes, your unsecured cc debt would be discharged in a Chapter 7, as would it in a 13, but it gets more complex in a 13 to say the least. In a Chapter 7, your creditors would receive not a penny in most circumstances.

What type of non-exempt asset are we talking about if you dont mind me asking?