Separated But Not Divorced: Community Property Surprise

09 Jul Separated But Not Divorced: Community Property Surprise

The modern view of marriage is a 50/50 partnership. The Bankruptcy Code turns that proposition on its head: all of a couple’s community property comes into the bankruptcy estate when one spouse files bankruptcy.

There’s no: my half, your half. If it’s community property, it’s all in when either spouse files.

A happily married couple with debt problems may see that result coming: they’ve met together with a lawyer and they’ve spotted reasons why only one spouse should file bankruptcy.

Divorced but not divided

It can be a brutal shock if, like many divorcing Californians, the couple has terminated their legal status as married persons, but left for later the division of the community property. So often, that division is complex and contentious. It’s easily put off to another day.

When one former spouse files a bankruptcy case, all of the couple’s property becomes subject to the control by a case trustee (or the debtor if the case is filed under Chapter 13.)

Community property states

It doesn’t matter that the non bankrupt spouse is living in the community house, or running a community business. The community property is property of the estate.

The good news is that all of the couple’s community debts are properly claims in the case. That may be a help to the non filing spouse if there are non dischargeable tax debts left from the marriage.

Exemptions and exclusions

All is not (necessarily) lost, if you are the non filing party. Any property that is exempted from the estate is still subject to division between the couple.

Often retirement assets are the most valuable asset that a married couple has acquired during marriage. Pensions, public retirement benefits, and 401(k) plans are not property of the estate, even if they are community property acquired during marriage.

State law controls characterization

The bankruptcy code looks to state law to characterize whether property is community or separate property. So, state law will drive the bus on what is community; federal law will tell us what happens thereafter.

The moral of this tale is that if you live (or maybe even lived) in a community property state and are splitting the sheets, you need to consider the risk to your contemplated division of marital property if your ex files bankruptcy.

Make sure your family lawyer is familiar with community property issues in bankruptcy or bring in a lawyer who is on top of these issues.

San Francisco Bay Area Bankruptcy SpecialistCathy Moran helps individuals and small businesses in Silicon Valley with their bankruptcy issues . She can often be found on Google+ and on Consumer Ledger, where she shares information about consumer protection issues and personal finance.

Image courtesy of richard_north.

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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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