Chapter 7 YOurs, Mine, and Ours: COMMunitY PrOPertY …€¦ · Chapter 7—Yours, Mine, and Ours: Community Property and Bankruptcy ... by the entirety.” 9B Am. Jur. 2d Bankr

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Chapter 7—Yours, Mine, and Ours: Community Property and Bankruptcy

Chapter 7

YOurs, Mine, and Ours: COMMunitY PrOPertY and BankruPtCY

Honorable Patricia C. WilliamsUS Bankruptcy Court

Eastern District of WashingtonSpokane, Washington

Marc BarrecaK & L Gates

Seattle, Washington

table of Contents

Introduction 7–1I Community Property Basics 7–1II Community Property and the Bankruptcy Estate 7–2III Discharge and Distribution Issues 7–2

A. Community Claims 7–3B. Chapter 7 Individual Bankruptcy 7–3C Chapter 13 Bankruptcy 7–7

IV Exemptions 7–8V. Contract Obligations Versus Tort Liabilities: A State-by-State Approach 7–8

A Idaho 7–8B Washington 7–10

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intrOduCtiOn Property rights are the cornerstone of any bankruptcy proceed-ing In a Chapter 7, the debtor’s property, with some exceptions, creates the bankruptcy estate. The estate, in turn, determines whether and how much a creditor is paid. “In a chapter 13 case, this property will be used to determine what the creditors would have gotten in a chapter 7, mak-ing sure that the reorganization is fair to all creditors.”1 In other words, property creates either the bankruptcy estate or liquidation analysis that will determine the amount of repayment, if any, that creditors receive. Thus, the determination and classification of property and property rights is essential to a successful bankruptcy proceeding. The presence of state community property law can complicate a bankruptcy proceeding when a divorce proceeding is involved or if only one spouse files. Although most jurisdictions do not have com-munity property laws, there are enough community property states to warrant the provisions dealing with community property found in the Bankruptcy Code Currently, the nine community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin 2 In addition, Puerto Rico allows community property. As a result, bankruptcy courts in the First (Puerto Rico), Fifth (Louisi-ana and Texas), Seventh (Wisconsin), Ninth (Alaska, Arizona, Califor-nia, Idaho, Nevada, Oregon, and Washington), and Tenth (New Mexico) Circuits have addressed community property issues

I. CoMMunIty ProPerty BasICs The Bankruptcy Code does not define community property, but the traditional meaning—property acquired during marriage that is equally owned by the couple—is generally applied.3 For the most part, state law controls the creation and definition of community property interests. As a result, state law determines whether a property inter-est is community or separate and whether the property is included in the bankruptcy estate 4 Generally, in applying the community property definition in bankruptcy, property acquired during domicile in a com-munity state during marriage is presumed community property,5 while

1 Andrew Cosgrove, Breaking Up Is Hard to Do . . . Especially When Bankruptcy Is Involved: A Look at the Unfair Results That Occur When a Bankruptcy Intervenes in Domestic Relations Cases, 14 Am. Bankr. Inst. L. Rev. 235, 249-50 (2006).

2 68 La. L. Rev. 219, n.8 (2007); Tex. Const. Art. XVI, §15; Ariz. Rev. Stat. Ann. §25-211 (2007); Cal. Fam. Code §760 (West 2007); Idaho Code Ann. §32-906 (2007); La. Civ. Code Ann. Art. 2355 (2007); Nev. Rev. Stat. §123.030 (2006); N.M. Stat. §40-3-8 (2007); Wash. Rev. Code §26.16.030 (2007); Wis. Stat. §766.31 (2007)).

3 In re Robertson, 203 F.3d 855, 859 (5th Cir. 2000) (quoting 5 Collier on Bank-ruptcy ¶541.13[1], 541-76, n.l (15th ed. 1999)); Dumas v. Mantle (In re Mantle), 153 F.3d 1082, 1084 (9th Cir. 1998).

4 Dumas v. Mantle (In re Mantle), 153 F.3d 1082, 1084 (9th Cir. 1998).5 La. Civ. Code Ann. Art. 2338; Cal. Fam. Code §§760, 2581.

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property acquired prior to marriage, by gift or inheritance, is treated as separate property 6

II. CoMMunIty ProPerty and tHe BankruPtCy estate Section 541(a)(2) states that community property that is included in the estate is based upon state law to determine if property is commu-nity or separate 7 With certain limitations discussed herein, §541 effec-tively makes community property part of the bankruptcy estate, regard-less of whether one or both of the spouses file.8

Upon filing a bankruptcy petition, the following community property becomes property of the estate: (1) all interests of the debtor and the debtor’s spouse in community property that is under the sole, equal, or joint management of the debtor, (2) all property that is liable for an allowable claim against the debtor, and (3) all property that is liable for allowable claims against both the debtor and the debtor’s spouse.9

III. dIsCHarge and dIstrIButIon Issues The primary purpose of bankruptcy is giving the honest debtor or debtors a “fresh start” by discharging certain debts. Bankruptcy Code §524 includes community debts as obligations subject to discharge. Even though only one spouse files bankruptcy, the entire community may receive a discharge,10 which means that the obligation is no longer en-forceable against any community property or the separate property of the filing spouse. Section 524 grants protection to after-acquired community prop-erty so long as both spouses are innocent of any wrongdoing.11 In other words, if all claims are dischargeable and both spouses are eligible for a discharge, even if only one spouse files, then community creditors are barred from asserting their claims against the couple’s after-acquired community property. As a result, a debtor spouse’s discharge prevents all collection of claims except against the nondebtor spouse’s separate property, with state law determining whether the separate property of the nondebtor spouse is liable for community claims. If a creditor believes that grounds exist to render an obligation nondischargeable as to the nonfiling spouse, then the creditor must comply with §524(b) and Federal Rule of Bankruptcy Procedure 4004(a) and 4007(c). Even though the spouse who filed the bankruptcy proceed-

6 In re Mantle, 153 F.3d at 1085 (citing Hicks v. Hicks, 211 Cal. App. 2d 144, 151, 27 Cal Rptr. 307 (1962)); Cosgrove, supra note 1, at 251-52.

7 In re Robertson, 203 F.3d 855, 858-59 (5th Cir. 2000).8 Brown, infra note 9, at §13:10 (citing Norton Bankr. Law & Practice §51:8;

Brown, Bankruptcy and Domestic Relations Manual §10:3 (2006 ed.); Collier on Bankruptcy ¶541.15 (Matthew Bender, 15th ed. 1990)).

9 Hon. William Houston Brown, Chapter 13. The Debtor’s Bankruptcy Estate, 2 The Law of Debtors and Creditors §13:10 (2007) (citing 11 U.S.C. §541(a)(2)).

10 Joan Henderson, For Better or For Worse: Liability of Community Property After Bankruptcy, 29 Idaho L. Rev. 893, 898 (1992).

11 4 Collier on Bankruptcy ¶524 02[3]

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ing may be innocent of any wrongdoing, a creditor must commence an adversary proceeding against the nonfiling spouse if the creditor has grounds to believe the nonfiling spouse has engaged in wrongdoing.a. Community Claims Bankruptcy Code §101(7) defines a community claim as a “claim that arose before the commencement of the case concerning the debtor for which property of the kind specified in section 541(a)(2) of this title is liable, whether or not there is any such property at the time of the com-mencement of the case.”12 A community claim allows creditors of the debtor spouse and the nonfiling spouse to participate in a bankruptcy proceeding if the claim is enforceable against community property in the bankruptcy estate. Thus, a community creditor is any creditor that can satisfy any portion of its claim from the community property. How-ever, a creditor has only one community claim when it holds a joint and several liability against both spouses.B. Chapter 7 Individual Bankruptcy One issue unique to community property is the effect of one spouse’s misconduct on the dischargeability of debts. 1. only one spouse Files. In a Chapter 7, if only one spouse files, the community property still becomes part of the bankruptcy es-tate and, as a result, Section 363(h) does not apply to the nondebtor spouse 13 Although Section 363(h) does not apply to community prop-erty, the nondebtor spouse does have “a right of first refusal to purchase the property at the price at which such sale is to be consummated.”14 The nondebtor spouse must exercise his or her right by offering to pur-chase the property at the outside sale’s price and before the outside sale is consummated 15

a. nonfiling spouse discharge. The primary reason a spouse would not join a bankruptcy proceeding is to protect his or her separate property 16 The debtor spouse’s filing ultimately affects the nondebtor spouse’s credit and community interests, but nonparticipation will keep the nondebtor’s separate property out of the bankruptcy estate State law also determines whether the bankruptcy estate includes community property managed solely by the nonfiling spouse. b. Future separate and Community Property. The sepa-rate property of the nonfiling debtor will remain subject to community

12 11 U.S.C. 101 §(7).13 2C Bankr. Serv. L. Ed. §20:282 (2008). Generally, Section 363(h) allows the

trustee or debtor in possession to sell “the estate’s interest and the interests of a co-owner in property in which the debtor had, at the time of the commencement of the bankruptcy case, an undivided interest as a tenant in common, joint tenant, or tenant by the entirety.” 9B Am. Jur. 2d Bankr. §1701 (2008). Of course, the trustee must satisfy certain procedures, which are beyond the scope of this article.

14 9B Am. Jur. 2d Bankr. §1704 (citing 11 U.S.C. 363(i)).15 Id.16 Henderson, supra note 10, at 901-2.

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claims as allowed by state law. The filing debtor receives a discharge from any liability, but the nonfiling debtor does not. The discharge renders the claim unenforceable against property of the estate, but the nonfiling debtor’s separate property is not property of the estate. The discharged community property also receives in rem protection for fu-ture community property 17 The nondebtor spouse’s separate property does not benefit from the debtor spouse’s discharge because the non-debtor spouse’s separate property was not included in the bankruptcy estate. This is particularly significant in cases of postbankruptcy divorce or death. “Without a personal discharge, [the nondebtor spouse’s] pro-tection depends on the status of the property.”18 Thus, the nondebtor spouse’s prebankruptcy and postbankruptcy separate property will re-main liable or obligated. In addition, if the marriage ends because of death or divorce, then the status of the community property will change to separate property. As a result, the previous community property will once again be liable or obligated because the nondebtor spouse never received a personal discharge and the property is now separate property of the nonfiling spouse. In essence, a community property discharge is only valid dur-ing the marriage. Once the marriage is over, §524(a)(3) protection no longer applies. Further, if a debt from a previous bankruptcy proceeding was denied discharge, then the debt may not be discharged in a future bankruptcy proceeding 19 Thus, if the nondebtor’s misconduct makes a community debt nondischargeable, the same community debt remains nondischargeable in a subsequent proceeding by the nondebtor. Future community property, however, is not subject to the nondischargeable debt so long as the guilty spouse is “not guilty of further wrongdoing since the first bankruptcy.”20

c. the Innocent spouse and Community discharge. Cer-tain conduct of the nondebtor spouse can drastically affect the commu-nity discharge. Both the debtor’s and nondebtor spouse’s conduct is rel-evant to the community, which is a single entity. Two types of conduct will affect the community discharge. First, there are certain types of community debts that are “per se” nondischargeable, such as child support or alimony. Future community property will remain liable for a nondebtor spouse’s nondischargeable community debts, despite the innocent spouse’s and the community’s discharge In other words, neither spouse can use bankruptcy to protect community property from nondischargeable debts. Second, there are certain types of behavior, such as fraud, that may operate to deny a debtor’s discharge If the nondebtor spouse has engaged in such behavior and a determination of nondischargeability is

17 Henderson, supra note 10, at 902 18 Henderson, supra note 10, at 903 19 11 U.S.C. §523(a)(10).20 Henderson, supra note 10, at 916.

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made, the same rule that would deny the nondebtor spouse’s discharge will also operate to deny the community discharge. In other words, a debtor spouse can receive a separate property discharge, but the non-debtor spouse’s misconduct taints the community discharge. The inno-cent spouse’s involvement in the conduct is irrelevant; the vicarious de-nial of discharge applies “simply because the debtor’s spouse is guilty.” However, unlike other situations regarding “per se” nondischargeable obligations, an adversary proceeding must be timely brought against the nonfiling spouse in order to determine if the conduct has resulted in a debt not subject to discharge. In addition, if the innocent spouse files bankruptcy within eight years of the guilty spouse’s denial of discharge, the innocent spouse will receive a discharge, but the community property will remain liable.21 Even if the community does receive a discharge, any subsequent filing within eight years of the previous bankruptcy will not discharge claims otherwise enforceable against the community property acquired after the first bankruptcy.

d. Marital dissolution. Commencement of a bankruptcy af-ter a marital dissolution normally does not involve any principles of community property law. If the dissolution divides the community prop-erty, the debtor has only separate property, which becomes property of the estate. If the dissolution does not divide the community property or the dissolution is not complete at the time of filing, then all community property and the entire debtor’s separate property is property of the bankruptcy estate A divorce that occurs postfiling but predischarge will not affect the bankruptcy estate. Bankruptcy Code §541(a) states that a bankrupt-cy petition filing creates the bankruptcy estate.22 Thus, a postfiling di-vorce decree that divides nonexempt community property will not have an impact on the distribution of the bankruptcy estate. Although most bankruptcy estates will exhaust all nonexempt property to pay credi-tors, a solvent estate will reduce the amount of community property available for the state court to award to the nonfiling spouse.23 In such circumstances, postdivorce, the nondebtor spouse’s separate property, which may include former community property, will still be liable be-cause the nondebtor spouse never received a personal discharge.24

In sum, even though §541(a)(2) of the Bankruptcy Code includes community property and former community property that has not been

21 11 U.S.C. §727(a)(8). Note that BAPCPA extended the period from six to eight years

22 11 U.S.C. §541(a).23 Henderson, supra note 10, at 922 24 Henderson, supra note 10, at 923

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partitioned as of the petition date,25 former community property parti-tioned and reclassified as separate property prior to the filing will not be included in the debtor’s estate.26

2. distributions on Claims. In a Chapter 7 proceeding, §726 applies to cases where the bankruptcy estate includes community prop-erty. That section separates the estate into subestates of community property and separate property. Essentially, a debtor’s bankruptcy es-tate consists of separate and community property estate subestates. The separation should parallel the state law community property scheme.27 The bankruptcy estate is subdivided into four subestates: (1) all com-munity property specified in §541(a)(2), except (2) community property that is solely liable for the debts of the debtor;28 (3) all other noncommu-nity property (i.e., separate property); and (4) any remaining assets. The order of distribution and payment of claims is determined by the various subestates:

First, administrative expenses are paid equitably from both kinds of property; Second, community claims against the debtor or the debtor’s spouse are paid from commu-nity property, except such as is liable solely for the debts of the debtor; Third, community claims against the debt-or, to the extent not paid under the above provision, are paid from community property that is solely liable for the debts of the debtor; Fourth, to the extent that all claims against the debtor including community claims against the debtor are not paid under the above provisions, such claims shall be paid from property of the estate other than community property of the estate; Fifth, if any community claims against the debtor or the debtor’s spouse remain unpaid, they are paid from whatever property remains in the estate 29

25 In re Robertson, 203 F.3d at 861; Dumas v. Mantle (In re Mantle), 153 F.3d 1082, 1085 (9th Cir. 1998); McCoy v. Bank of America (In re McCoy), 111 B.R. 276 (9th Cir. BAP 1983); Miller v. Walpin (In re Miller), 167 B.R. 202 (Bankr. C.D. Cal. 1994); In re Hendrick, 45 B.R. 976, 983-4 (Bankr. M.D. La. 1985).

26 In re Robertson, 203 F.3d at 861; Paderewski v. Barret (In re Paderewski), 564 F.2d 1353 (9th Cir. 1977); Keller v. Keller (In re Keller), 185 B.R. 796, 800 (9th Cir. BAP 1995); In re Stouder, 164 B.R. 59, 64 (E.D. La. 1994).

27 6 Collier on Bankruptcy ¶726.05[1] (citing In re Hicks, 300 B.R. 372, 376 (Bankr. D.Idaho 2003), and Merlino v. Weinstein (In re Merlino), 62 B.R. 836 (Bankr. W.D. Wash. 1986)).

28 Subestate 2 is usually unfunded except in two circumstances. 6 Collier on Bankruptcy ¶726.05[1]. First, where the state scheme insulates a community property business solely managed by the debtor. Id. Second, “in Texas, where certain commu-nity property is under the sole management and control of one spouse . . . if the non-debtor [spouse] has no tort creditors.” Id.

29 In re Robertson, 203 F.3d at 863 (citing 11 U.S.C. §726(c); H.R. Rep. No. 95-595, at 383-384 (1977); S. Rep. No. 95-989, at 97-98 (1978)).

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In effect, §726(c) provides the procedure for distributing the com-munity property estate created by §541(a). The case In re Martell30 provides an example. Debtor filed for Chapter 7 bankruptcy in September 2004, and all of the listed debts were separate obligations incurred prior to marriage.31 Debtor and her spouse filed a joint tax return for the 2004 tax year, which entitled them to a tax refund of $5,258 32 Trustee claimed $3838.34 as the amount that consti-tuted property of the bankruptcy estate 33 The nondebtor spouse paid most of the taxes because he earned approximately five times more than debtor did 34

The court, applying Section 541 and Idaho state law, determined that the entire tax refund was community property and, therefore, the entire prorated amount was property of the bankruptcy estate 35 The court then distributed the refund according to Section 726(c). First, the tax refund was used to pay administrative expenses 36 The remaining portion was then applied to the creditor’s community claims against ei-ther the debtor or the debtor’s spouse 37 Since, under Idaho law, com-munity property could be used to pay premarital separate debts, the remaining portion of the tax refund was used to pay all of the debtor’s separate obligations under Section 726(c).38

C. Chapter 13 Bankruptcy Generally, a Chapter 13 discharge will prevent a community creditor from asserting a claim against after-acquired community prop-erty 39 There are many similarities between a Chapter 13 and a Chapter 7 proceeding, at least in the context of community property. First, the distribution scheme for a Chapter 13 is the same as §726(c). Second, the Chapter 13 “best interest test” is the same as the Chapter 7 liquidity cal-culation, which determines whether a creditor would receive at least the same benefits in a Chapter 13. Third, both Chapter 7 and Chapter 13 will not discharge the community property in certain situations 40

There is one primary difference. If a debtor spouse has received a Chapter 7 discharge within eight years, which bars him or her from obtaining a discharge in another Chapter 7,41 the other spouse may file

30 349 B.R. 233 (Bankr. D. Idaho 2005).31 Id. at 235 32 Id.33 Id.34 Id.35 Id. at 236-36.36 Id. at 237 37 Id.38 Id.39 8 Collier on Bankruptcy ¶1300 12[2] 40 11 U.S.C. §524(b)(2).41 11 U.S.C. §727(a)(8).

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a Chapter 13 petition so long as neither spouse was denied a discharge within the past six years 42

IV. exeMPtIons Section 522(b) allows an individual debtor to exempt certain property. State law determines the exemptions, and community prop-erty law will determine “whether one spouse may assert community exemptions on behalf of the community, even if the other spouse has not filed bankruptcy.”43

When a debtor spouse files an individual bankruptcy petition that the other spouse does not join, the debtor spouse has the sole right to claim exemptions in the community property that is included in the bankruptcy estate 44 Although a nondebtor spouse can declare some ex-emptions as a dependent of the debtor spouse, the nondebtor spouse’s exemptions cannot supplement the debtor spouse’s list of exemptions.45 If the nondebtor spouse subsequently files his or her own individual bankruptcy, the same exemptions in the community property are not available.46 As a result, the subsequent debtor spouse can only claim exemptions that the initial debtor spouse missed.

V. ContraCt oBlIgatIons Versus tort lIaBIlItIes: a state-By-state aPProaCH

a. Idaho Idaho allows either spouse to manage and control community property with one exception: any transaction regarding community real estate requires joint execution.47 In addition, “a spouse’s separate property is not subject to seizure to satisfy a debt incurred by the other spouse acting alone.”48 As a result, whether premarital or postmarital, when the executing spouse acts unilaterally, debts or obligations do not attach to the other spouse’s separate property. The community property, on the other hand, is subject to prenuptial debts or obligations.49

1. Contract obligations. In Idaho, when a spouse incurs a postmarital debt for the benefit of the community, both the spouse’s separate property and the community property are obligated. The other spouse’s separate property, however, is not liable unless the spouse con-

42 11 U.S.C. §524(b).43 9A Am. Jur. 2d Bankr. §1415 (2007) (citing In re Perez, 302 B.R. 661 (Bankr.

D.Ariz. 2003)).44 Burman v. Homan (In re Homan), 112 B.R. 356, 359 (9th Cir. B.A.P. 1989) (citing

11 U.S.C. §§541(a)(2)(A) and 522(b)).45 In re Homan, 112 B.R. at 359 (citing 11 U.S.C. §§522(a)(1) and 522(1)).46 Steward v. Morris (In re Steward), 227 B.R. 895, 899 (9th Cir. B.A.P. 1998).47 I.C. §32-912.48 In re Hicks, 300 B.R. 372, 376 (Bankr. D.Idaho 2003). I.C. §§32-910 through

32-912.49 I.C. §32-912; Williams v. Paxton, 98 Idaho 155, 161, 559 P.2d 1123, 1129 (1976).

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sented 50 In addition, “[a] creditor can collect against community prop-erty of both spouses to pay the separate debt of one spouse.”51

2. tort liability. Idaho law is unsettled about whether com-munity property is liable for the tortious conduct of one spouse. Neither the Idaho State Legislature nor the Idaho Supreme Court has addressed the general rule as to tortious conduct. Generally, a creditor can execute against community property to satisfy a separate debt of one spouse 52 As a result, Idaho courts have ap-plied the general rule to circumstances of tortious conduct that benefit-ted the community or occurred in management of the community Con-cerning circumstances where the tort neither benefits the community nor occurs during management of the community, the law is unclear. Although there has been “some uncertainty surrounding this area of law,”53 bankruptcy practitioners should be aware that the United States Bankruptcy Court for the District of Idaho has held that “community property can be reached to satisfy a creditor’s claim against one spouse for [all] tortuous conduct. . . .”54

The confusion over the current State of Idaho law results from the Hansen v. Blevins case 55 In that case, the Idaho Supreme Court refused to assert a bright-line rule that community property is always liable for the tortious conduct of a single spouse.56 Instead, the court stated that “it is not necessary to a decision in this case to determine whether community property is liable in all cases for the payment of obligations incurred by the tort of the husband,” because the husband committed the tort while managing the community business Prior to Hansen, First National Bank v. Samuels held that commu-nity property is not liable for tortious conduct unless both spouses are defendants to the tort complaint.57 In another prior case, the federal Dis-trict Court for the Eastern District of Washington determined that, un-der Idaho law, a couple’s community property was not liable for the tor-

50 Id. Idaho Code 32-912 (2007).51 Amato v. U.S., 94 F.Supp. 2d 1081, 1085 (D. Idaho 1999) (citing Bliss v. Bliss,

127 Idaho 173, 898 P.2d 1081, 1084 (1995)). If, however, a spouse fraudulently or self-ishly depleted community property to preserve separate assets, the community may be entitled to reimbursement. Bliss, 127 Idaho at 173

52 In re Hegg, 239 B.R. 833, 836 (Bankr. D.Idaho 1999) (citing Bliss, 127 Idaho 898).

53 Id. (citing The Uncertainty of Community Property for the Tortuous Liabilities of One of the Spouses: Where the Law Is Uncertain, There Is No Law, 30 Idaho L. Rev. 799 (1994)).

54 Id.55 Hansen v. Blevins, 84 Idaho 49, 367 P.2d 758 (1962).56 Hansen, 84 Idaho 57 (1962).57 First National Bank v. Samuels, 53 Idaho 780, 780, 27 P.2d 959, 960 (1933).

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tious conduct of the husband because the act had “no connection with the community and the community receives no benefit therefrom.”58

The Idaho Supreme Court’s most recent decision held that “[c]om-munity assets may be reached to satisfy a debt incurred by one spouse’s fraud committed during marriage even if the other spouse is completely innocent of the fraud and has no personal liability where the fraud ben-efits the community or occurs during the spouse’s management of the community.”59 As a result, whether the community property is liable for the tortious conduct of one spouse—that neither benefits the commu-nity nor is outside the management of the community—is unclear.B. Washington Washington law presumes that any debt incurred during marriage is a community debt unless a spouse proves by clear and convincing ev-idence that the debt is separate 60 If there is no community, due to death or divorce, there is no community left to support the presumption. In Washington, both spouses have an equal right to manage and control community property except in the following circumstances:61 (1) a spouse cannot devise or bequeath more than his or her one-half in-terest in the community property; (2) a spouse cannot give community property with the express or implied consent of the other spouse; (3) any transaction regarding community real property requires the joining and acknowledgment of both spouses; (4) the purchase or contract of com-munity real property requires joint involvement or execution; (5) except for purchase money security interests, a security interest in household goods requires a joint execution; and (6) when both spouses manage a business, any transactions regarding the assets, real estate, or goodwill of the business requires joint participation. 1. Contract obligations and “Marital Bankruptcy.” Gener-ally, the debts of each character are collectable only from assets of the same character, i.e., community obligations first collectable from com-munity assets and separate obligations from separate property. Mar-riage may terminate significantly reduce a creditor’s right to collect a judgment for a prenuptial debt.62 Where a creditor’s only avenue for recovery is garnishment of the wages of an unmarried person, the mar-riage of that person may cause “marital bankruptcy” because the debt-or cannot collect against the community property wages without the spouse’s consent 63

Revised Code of Washington 26.16.200 provides a limited rem-edy for creditors. Under the statute, a premarital creditor may execute a

58 Great Am. Indem. Co. of N.Y. v. Garrison, 75 F.Supp. 811, 815 (E.D. Wash. 1948).

59 Hegg v. I.R.S., 136 Idaho 61, 63, 28 P.3d 1004, 1006 (2001).60 1 Wash. Prac. §20.10 (2007).61 RCW 26.16.030.62 19 Wash. Prac. §14.7 (citing RCW 26.16.200).63 Id. (citing, e.g., State v. Miller, 32 Wash. 2d 149, 201 P.2d 136 (1948)).

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judgment against the premarital debtor’s wages.64 The claim, however, must be reduced to judgment within three years of the marriage, and the debtor has no obligation to inform the creditor of the marriage.65

Regarding debts incurred during marriage, except in cases in-volving family expenses, if one spouse unilaterally enters into a con-tractual obligation, then the noncontracting spouse’s separate property is not obligated.66 Only the contracting spouse’s separate property and the community property are obligated. 2. tort liability. If one spouse commits a tort during the marriage, the other spouse’s separate property is not liable for the tor-tious conduct “unless there would be joint responsibility between the spouses if they were unmarried.”67 “The community is liable for the tort of either spouse if the tort is calculated to, done for, or results in a benefit to the community.” In cases where only one spouse is liable as an individual, the tort plaintiff must first collect from the tortfeasor’s separate property before executing against the tortfeasor’s one-half interest in the community per-sonal property and real property 68 “If the tortfeasor’s separate property and share of the community personal property are insufficient to satisfy a judgment, a successful tort plaintiff may execute against the tortfea-sor’s interest in community real property.”69

In cases where the tort is committed in the management of the community business, the tort plaintiff may execute against the tortfea-sor’s community property interests before executing against the tortfea-sor’s separate property interest

64 Id. (citing Stafford v. Stafford, 10 Wash. 2d 649, 117 P.2d 753 (1941), and Knittle v. Knittle, 2 Wash. App. 208, 467 P.2d 200 (1970)).

65 Id. (citing Watters v. Doud, 92 Wash. 2d 317, 323, 596 P.2d 280, 284 (1979)).66 1 Wash. Prac. §20.10.67 Id. (citing RCW 26.16.190).68 Note, however, in the event a tort plaintiff collects the judgment from the

tortfeasor’s one-half interest in community personal and real property, the tortfeasor’s spouse is entitled to an equitable lien in the same amount as the judgment collected.

69 Id. (citing Keen v. Edie, 131 Wash. 2d 822, 935 P.2d 588 (1997)).

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Documents

Chapter 7 YOurs, Mine, and Ours: COMMunitY PrOPertY …€¦ · Chapter 7—Yours, Mine, and Ours: Community Property and Bankruptcy ... by the entirety.” 9B Am. Jur. 2d Bankr