Some Bankruptcy Considerations in Marriage, Divorce and after Death of Spouse

Spouses are often concerned about being liable for the debts their spouse incurred.

Sometimes when they get divorced they are concerned that they will be liable after the divorce for more debt than they anticipated. For example, you and your spouse might agree to split the debt 50-50. You pay your ½ but your ex doesn’t pay his or her ½ and instead declares bankruptcy. What happens to you? Are you left “holding the bag”?

Another area of concern is when a couple is planning to get married. Will one spouse be liable for the pre-marriage debts of the other spouse?

First of all let me clear something up: There is no such thing, in California, as “Community debt” or “separate debt”. A debt is either husband’s debt, wife’s debt or a joint debt (because they both signed the papers creating the debt).

An important issue is what property can be seized by a creditor to satisfy a debt. If an item of property may be seized to satisfy a particular debt then it is said that the particular item of property is “liable for the debt.” Here’s a simplification of the rules:

1. Terminology: Community property is generally property that was acquired by a spouse during marriage other than property acquired by gift or inheritance. The profits made from community property is considered community property (for example interest earned on community funds held in the bank) An item of property can be a blend of separate property and community property. For example, let’s say that when a couple marries the wife already owns a home. During marriage husband or wife uses earnings (community property) to pay down the mortgage. In that case, the house will be partly community and partly the wife’s separate property.

2. Community property is liable for the debt of either spouse and for the joint debts.

3. Generally, the separate property of one spouse is not liable for the debt of the other spouse. But there is an important exception: The separate property of one spouse is liable for the debts of the other spouse if the debt was for the necessaries of life of that other spouse.

4. The separate property of a spouse is liable for that spouse’s debts and for the joint debts.

5. If a couple gets divorced the portion of the community property awarded to a spouse is not liable for the debts of the other spouse unless the debt was assigned to the non-debtor spouse in the divorce agreement.

6. If, in the divorce, a joint debt is assigned to one spouse (let’s assume the husband) but the husband declares bankruptcy the wife may still be sued by that creditor but the wife can sue the husband for reimbursement even though he has declared bankruptcy. As between the divorcing spouses, the duty to pay a debt assigned to that spouse is not discharged in bankruptcy. 523(a)(15)

7. The above rules apply to pre marriage debts with one important exception: The wages of the non debtor spouse are not liable for the pre marriage debts of the other spouse. And the non debtor spouse’s wages keep their protection so long as the wages are kept in an account that is not subject to the control of the debtor spouse.

8. What if your spouse has died?  Can the property you receive from your deceased spouse be taken to satisfy the debts of your deceased spouse?  The answer is:

If a non debtor spouse receives community property after a debtor dies that property remains available to satisfy the debt if there is no probate. But if there is a probate a claim must be made in the probate estate within the time limit. (the later of 4 months from the issuance of letters of administration or 60 days after notice of administration to the creditor)

If there was a revocable trust the claim against the asset must be made by the later of 4 months from the date notice is published or 30 days actual notice is given to the creditor.

So what does all this mean to you?

1. If you are planning on marrying someone that has a lot of debt then your soon-to-be spouse with all the debt might consider declaring bankruptcy before or shortly after getting married. This will protect the community property from being liable for the debts of the debt owing spouse. As mentioned above the wages of the non-debtor spouse are automatically protected.

2. If you are getting divorced your share of what was the community property will be liable for 100% of your debts and the joint debts. This is true even if your ex-spouse has agreed to pay ½ of them.

But if your ex-spouse fails to pay a joint debt that was assigned to your ex-spouse in the divorce you can sue your ex-spouse for reimbursement. This is true even if your ex-spouse has declared bankruptcy. The chapter 7 bankruptcy of your ex-spouse does not discharge his duty to you to pay the debt However it’s different for chapter 13. The duty to the former spouse to pay the debt to the third party can be discharged in chapter 13. 523(a)(15)

We see this all the time: A couple gets divorced. They have a joint debt e.g. a credit card or bank loan in both spouse’s names. In the divorce agreement, one spouse, say the husband, agrees to pay ½ of the joint debt. But the husband fails to pay the debt and perhaps declares bankruptcy. The wife and her property will be liable for 100% of the debt even though the husband agreed to pay ½.
In that situation, the wife would have the right to sue the husband for indemnity or reimbursement even though he has declared bankruptcy. But if the ex has no money then the wife might consider declaring bankruptcy herself.

3. Fortunately your share of the former community property will not be liable for your ex’s debts unless you agreed to assume them in the divorce agreement.

4. If you’re planning on getting divorced and filing bankruptcy you’re in a tricky situation. Once you declare bankruptcy you don’t owe your creditors anything (except for non-dischargeable debts like most taxes, student loans, etc.) But if a debt was assigned to you in the divorce and your ex gets sued your ex can sue you for indemnity (reimbursement). What can you do?

a) One approach, if possible, is to avoid having any debts assigned to you that your ex could be sued for. You’ll have to work that out with your divorce attorney.
b) Another approach is to declare bankruptcy before you get the debts assigned to you in the divorce. Note: If you’re filing bankruptcy while married, and you need to use the 703 exemptions, you might have trouble getting your spouse to file the waiver.
c) A third approach is to file a chapter 13 bankruptcy instead of a chapter 7. The duty to your ex to pay the debts assigned to you in the divorce is dischargeable in a ch 13.

I realize this can be confusing. Feel free to give me a call and we can go over this on the phone or in person.

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