Fun, But No Games, In Community Property Bankruptcies

10 Jan Fun, But No Games, In Community Property Bankruptcies

Practicing bankruptcy law doesn’t provide many moments of sheer glee, but telling debt collectors about the scope of the community property discharge is surely one of them.

But she didn’t file bankruptcy, goes the charge. Her husband’s discharge doesn’t eliminate her debt, they insist.

I chuckle and respond: But you can’t collect from her wages. Ever. For as long as she’s married.

This is California, a community property state, and as every stand up comic knows, things are different here.

When one spouse in a community property state gets a bankruptcy discharge, the creditors of the community cannot enforce their pre bankruptcy claims against any community property that the couple acquires in the future.

So, even if the non filing spouse is the only one to sign the credit application, if that creditor had notice of the bankruptcy, they cannot collect her debt from community property.

Pretty powerful, no?

It’s all set out in the Bankruptcy Code: section 524(a)(3) describes the boundaries of the community property discharge.

In my view, the fairness of what every debt collector will tell you is both impossible and unfair is found in the law that describes property of a bankruptcy estate.

When one spouse files a bankruptcy, all of the community property comes in to the bankruptcy estate.

Not just the filing person’s half of the community: all of the marital property.

That’s because, in a community property system, all of the community is liable for the debt of either spouse. It matters not which spouse earned the money nor which contracted for the debt. We’re both in this togetheris the theme.

220px-Community_property_states.svgThis isn’t a California specific result. It happens in any of the nine community property states.

Limitations

While the protection afforded the spouse who doesn’t file bankruptcy is less than the discharge the filer gets, it’s still pretty effective, once you pound the law into the head of the debt collector.

Any separate property that the non filer has remains exposed to their debts. And if the marriage ends, by death or divorce, there is no longer a community. Any debt that is within the statute of limitations can be collected against the non filer.

So I treasure those moments on the phone with the cock-sure debt collector, grinning widely as I read him the law. And tell him that if he missteps, I’ll have a bankruptcy judge read him the riot act.

Sometimes, life is sweet.

Fun button courtesy of Hodgers; map courtesy of Wikipedia.

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Cathy Moran, Esq.

I'm a certified specialist in bankruptcy law (California State Bar Board of Legal Specialization) practicing in the San Francisco Bay Area for more than 30 years. In addition to practicing bankruptcy law, I train new practitioners at Bankruptcy Mastery.
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