Community Property And Bankruptcy

August 9, 2023

I am not a lawyer, I am a judgment broker. This article is my opinion, based on my experience in California, and laws vary in each state. If you ever need legal advice or a strategy to use, please contact a lawyer.

What if one has have a judgment debtor, and their non-debtor spouse filed for Chapter 7 no-asset Federal bankruptcy court protection? What if only the non-debtor spouse filed for bankruptcy, and the debtor-spouse did not?

How can one recover a judgment against the judgment debtor spouse, when their non-debtor spouse filed for bankruptcy protection, or has already discharged their debts in bankruptcy? How does this affect one trying to recover a judgment from the non-bankrupt debtor spouse in a community property state?

After the non-debtor spouse has started a bankruptcy, or has already discharged their debts; actions to satisfy the debtor spouse’s debt with community property is stayed (forbidden and illegal).

The debtor spouse’s sole and separate property is usually subject to levies to satisfy a judgment. However, one must be extra careful not to violate a bankruptcy court’s order, and do their homework.

If you did not intentionally violate the bankruptcy stay, and return the money/release the levy, as soon as you learn about the bankruptcy, it will be hard for anyone to hold you liable for sanctions. With a small judgment, or when the debtor is and will remain poor, it might be best to stop reading here, and write off the judgment.

Bankruptcy stay violations can result in dire penalties, so one must be careful to have Sheriffs or marshals levy only non-stayed and/or non-dischargeable assets. To be extra safe, one should make double-sure which assets are actually and legally available first.

One of the best ways to look before you leap, is with a debtor examination (often with a document production request). This is done by scheduling and serving an OEX (Order to appear for EXamination) on the judgment debtor. In California, a judgment debtor exam creates a one-year “silent lien” on all their personal property, which might make you a secured creditor if they later file for bankruptcy protection.

When bankruptcy is involved, it is mandatory to first get permission from the bankruptcy court, before attempting any enforcement or discovery actions against a debtor.

To help strategize what your first or next recovery strategy should be, you could start by asking the bankruptcy court for leave (permission from) their BK court, to permit you to get a state court issued OEX (Order to appear for EXamination), served on the judgment debtor, with the included (at least in California) OEX lien against only the debtor spouse’s sole and separate property.

In many states, serving an OEX on a judgment debtor creates a lien against their personal property. In California, serving an OEX on a judgment debtor spouse creates a 1-year silent lien against the personal (although not real-estate based) and community property shared by the other spouse, if it is not stayed by a bankruptcy protection.

The debtor and their spouse have a one hundred percent indivisible interest in the community property of the marital assets, as long as they are married to each another. In a community property state, when one spouse’s debts become discharged by a bankruptcy, the community property that was acquired pre-petition (and usually pre-discharge), is immune to levy because of the “phantom discharge” created by current laws. (I am not a lawyer.)

The word “phantom” in the phrase “phantom discharge” means that in a community property state, there can be an extra bankruptcy protection when one spouse files for bankruptcy protection, that may protect the assets of the other debtor spouse. Usually, “phantom discharges” occur only in community property states (currently Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and probably Wisconsin).

A phantom discharge occurs when personal and real estate-based community property becomes immune from judgment enforcement against a judgment debtor spouse, because the non-debtor bankrupt spouse owns a one hundred percent and indivisible interest in the community property estate, and that spouse’s indebtedness has been discharged. Note also, that Chapter 13 bankruptcy shields co-debtors on the petitioner’s debts!

A phantom discharge is an unearned shield against creditors for the community property assets of both spouses in a married couple, even when only one spouse discharges their debts in bankruptcy. (See BK codes 11 US 541 and 11 US 524).

As long as the couple remains married, the phantom discharge remains, which is often a great injustice for judgment creditors of the (non-bankrupt) debtor spouse.

If the married couple qualifying for a phantom discharge gets divorced, one could petition the family court to enjoin the dissolution proceedings, and levy the nonexempt portion of the debtor spouse’s half of their marital estate, if any.

Only people or entities can get bankruptcy discharges. Property is not an entity, so it cannot get a discharge. Sometimes a judgment debtor does not win in bankruptcy court, and one or all, of their debts are declared non-dischargeable.

In most community property states; and in California, family code section 910 (a), specifies that the real and personal property of the community estate can be used to satisfy the debts of either spouse incurred during or before marriage. This means that real or personal property of the community estate can be used to pay a non-dischargeable debt.

This is the opposite of a phantom discharge, so creditors get a wide open path to all of the community assets of the judgment debtor. Other relevant California laws are Family codes 902, 903, 910-916, and CCP 487.010. Family Code 916 trumps code 910 after divorce. Separate money is separate money, period. Only former community property assets received/assigned by the nondebtor spouse at division from the judgment debtor is liable.

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