Community Property Debts After Bankruptcy

menage a troisWhen spouses file bankruptcy together, the debts incurred during their marriage are discharged as to both of them.

But when one spouse, or one’s ex spouse, files bankruptcy, the result is more complex.

The Moran Law Group practices in California,  a community property state. This post discusses the family laws of California. It may not apply to family law of other states.

Personal liability

Bankruptcy wipes out the  personal  liability  of the individual filing for any dischargeable debt.

Debts generally arise either by

contract (created by the agreement of the debtor and the creditor)

tort (arising by law from the negligent or intentional harmful act of the debtor); or by

statute (arising by operation of law, like taxes, or by court order, like family support).

If you are personally liable for a debt, the creditor can  levy on property you own or your earnings to satisfy the debt.

Liability of community property

In addition to the personal liability of the two spouses, there is a third “party” in a marriage in a community property state.  It’s the marital community.

California community property is liable for the debts of either spouse incurred during the marriage.

It is also liable for the debts of either spouse incurred before marriage.

Community property generally  includes real estate, tangible assets, and earnings of both spouses acquired during the marriage;

Community property does not include assets acquired by either spouse by gift or inheritance while they are married or assets owned by either spouse before marriage. More about the principles of California community property.

Who is liable after divorce

When spouses divorce, the community property is divided between the spouses and becomes their separate property.   There is no longer any community property for creditors of the marriage to look to.

The liability question is then:  is this individual, the former member of a marital community, personally liable for the debt in question?

In general, you are liable if you incurred the debt (bought goods on your credit card; signed the loan;  incurred the debt in operation of your business; signed the tax return from which the tax liability arises, or caused the accident that injured someone.)

You are not usually personally liable for debts on your spouse’s credit card (unless you signed the application, too); for your spouse’s tort debts;  or for your spouse’s taxes if you did not file jointly.

Note that the family court can create personal liability for either spouse for a debt in the course of dividing the debts upon divorce.

Marital debts after a bankruptcy

The bankruptcy discharge affects the personal liability only of the debtor in the case.

When one spouse gets a discharge,  the creditor can collect the debt from the non filing spouse, if that spouse is personally liable for the debt.  If the spouses are still married, the creditor cannot, however, collect the debt from community property acquired after the bankruptcy was filed.

The community property, the third “person” in the marital community, gets protection in perpetuity from the debts that existed when one spouse filed bankruptcy.

Note, too, that any provisions in agreements or court orders made in connection with the divorce  requiring one spouse to indemnify (reimburse) the other spouse if third party creditors collect from the other spouse, is a debt that is dischargeable in Chapter 13.

Read more

 Filing bankruptcy without your spouse

 Family law issues in bankruptcy

 Debt collectors and the community property discharge

About the Author
 
 
Northern California bankruptcy lawyer Cathy is a 30+ year veteran of bankruptcy practice in the Silicon Valley. She is know for energetic representation of clients and her command of bankruptcy law.