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Community Property in Bankruptcy

by: Wade Waldrip on Thu May 26,2016 20:02:11

You may have heard that Arizona is a "community property state" but are unsure what that actually means. The concept of community property and its analogue, community debt, are critical in bankruptcy.

The concept of community property, which represents the prevailing law in only a relative handful of states, is a significant deviation from traditional American legal doctrine. Community property basically means that, with a few specific exceptions, all property or money acquired by either spouse while they're married is owned equally by both spouses. Thus, a nonworking wife automatically possesses one-half ownership of her working husband's salary. Similarly, husband has a one-half interest in his wife's IRA, even though she may have funded it entirely from her own salary. Simply stated, title to property generally does not determine ownership in community property states; the conclusive factor in ascertaining ownership is whether an asset was acquired while the parties (husband and wife) were married. If it was, it's probably community property. Stated another way, there is generally no "his" and "her" property in community property states. Rather, it's "our" property. Why is this important?

It sometimes occurs that, although married, a person should, or must, file an individual bankruptcy case rather than a joint case with his/her spouse. In these circumstances, the so-called "filing spouse" is required to disclose her community interest in the non-filing spouse's property. In other words, even though a husband may not be a party to his wife's bankruptcy case, property that husband may consider exclusively "his" is likely to become part of his wife's bankruptcy. This may have profound consequences when claiming exemptions allowed by state or federal law. Only an experienced bankruptcy practitioner can explain the intricacies of community property law in the context of bankruptcy.

The legal (and logical) counterpart to community property is community debt. This doctrine basically holds that most debts incurred by either spouse while married is owed equally by both husband and wife. This is true irrespective of which spouse actually incurred the debt. As in the case of community property, there is generally no "his" and "her" debt in community debt states. Rather, it is OUR debt. This is true even if, for example, a credit card was issued only in husband's name. If husband acquired the credit card while married, any resulting charges on that card are owed by husband AND wife, even though wife may never have used the credit card and all charges on it were incurred by husband.

Like its legal cousin, community property, community debt has significant ramifications in bankruptcy. Frequently, for example, a wife contemplating an individual bankruptcy case will assert that she doesn't want "husband's debts" included in her proposed bankruptcy case. This statement is largely meaningless in community debt states like Arizona, where there is, generally speaking, no such thing as "husband's debts" and "wife's debts." Instead, most obligations incurred while the parties are married are, by law, community debts, leaving both spouses responsible for paying them, no matter which spouse actually incurred the debts.

Both community property and community debt are important concepts in bankruptcy. It is vital to consult an experienced bankruptcy attorney if you are contemplating bankruptcy, who will guide you confidently through this legal minefield.

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