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socrateaser, Attorney
Category: Bankruptcy Law
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Experience:  Attorney and Real Estate Broker -- Retired (mostly)
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- My wife and I reside in California. - My wife and I separated

Resolved Question:

- My wife and I reside in California.
- My wife and I separated in June of 2011.
- Our divorce is pending.
- My wife filed for chapter 7 bankruptcy in May, 2012.
- Our home was abandoned by the bankruptcy trustee.
- We sold our house in Nov, 2012.
- The money from the house sale is sitting in her attorney's trust.
- We incurred community debt during the marriage that she discharged in her bankruptcy.
- I did NOT want to discharge my obligations (the community debt).
- I want to use the proceeds from the sale of our house to pay our community debt.
- My wife's bankruptcy attorney is saying her discharge was a "community discharge"
and I shouldn't be allowed to pay off the community debts with the proceeds from the house sale.


My question is: was my part of the community debt automatically discharged because of my wife's bankruptcy, even though we were legally separated?

If not, could you point me in the right direction for any case law so I can back up my position.

Everything I have read about community discharge included married couples but I can't find any info about how legal separation impacts the community discharge rule.

thanks in advance
Submitted: 1 year ago.
Category: Bankruptcy Law
Expert:  socrateaser replied 1 year ago.
My question is: was my part of the community debt automatically discharged because of my wife's bankruptcy, even though we were legally separated?

A: When one spouse files bankruptcy, all community property of the marriage becomes the property of the bankruptcy estate. In order to protect the entire community from a creditor's claim after bankruptcy, the claim must be characterized as a "community claim," as follows:

  • the debt must be owed by the debtor or the debtor's spouse;
  • the community property must be liable for the debt under applicable state law; and
  • that community property would be part of the debtor spouse's bankruptcy estate, whether or not that property was in existence at commencement of the case. In re Soderling (9th Cir. 1993) 998 F2d 730, 733.

Your facts clearly fall within the scope of a community claim. The house was community property before the bankruptcy was filed; you and your spouse owed for the mortgage, and the community was liable if you or your spouse did not pay the mortgage. A similar analysis can probably be made for every community property asset that existed before your spouse filed Chapter 7.

 

Because these were all community claims, then in general, a Chapter 7 discharge of either spouse enjoins creditors from enforcing any allowable community claim against postpetition community assets. 11 USC § 524(a)(3); see also In re Heilman (9th Cir. BAP 2010) 430 BR 213, 218–219. Which means that the community claims were discharged, and creditors cannot reach community property for satisfaction of community debts.

 

The point here is that the money in the trust account is still community property, but your creditors cannot reach it, because of the discharge. In other words, the family court should divide the money 50/50, and ignore any community debts, which are now all discharged and unreachable by either of your creditors.

I get the feeling that your spouse may be trying to keep all the money for herself. If that's true, then I believe that the family court will not concur (unless the judge doesn't understand bankruptcy law -- which is certainly possible). When the trustee abandoned the home back to your spouse, it remained community property of both you and your spouse, and so would the net proceeds of sale (absent some requirement for separate property reimbursement under Family Code 2640).

Hope this helps.
socrateaser, Attorney
Category: Bankruptcy Law
Satisfied Customers: 34138
Experience: Attorney and Real Estate Broker -- Retired (mostly)
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