04 Feb What Happens To Community Property In Bankruptcy
When one spouse filed a bankruptcy in a community property state, there’s no “my half, your half”. All of the community property becomes part of the bankruptcy estate. That includes the share of the community that would otherwise belong to the non filing spouse.
In return, all creditors who have claims that could be satisfied from community property under state law get to file claims in the case of the filing spouse. So, even creditors of the spouse who has not filed can participate in the bankruptcy distribution. They are also bound in part by the filer’s discharge.
Since all of the community property became part of the bankruptcy estate, upon the discharge of the filing spouse, all of the community property later acquired by the couple is free from the claims of the community creditors included in the bankruptcy. This is laid out in Section 524(a)(1)(3) of the Bankruptcy Code.
The discharge of the marital community provides substantial protection from creditors to the non filing spouse: the non filing spouse’s creditors can only satisfy their prepetition claims from the separate property of the non filing spouse. Creditors from states that don’t have community property are often disbelieving that their remedies against someone who has not filed bankruptcy can be limited by their spouse’s filing.
This protection from creditors accorded the non filing spouse isn’t as comprehensive as the protection as the filing spouse gets, but it is powerful nonetheless.
The inclusion of all of the community property can be a bombshell
Cathy Moran, Esq.
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