Every modern marriage is different, which means some of us deposit our paychecks into joint accounts and consider everything “ours,” while others maintain separate accounts and pay their own bills. But, in a community property state like California, the law doesn’t always recognize those divisions.
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It’s important to understand when married couples in Los Angeles are and are not responsible for one another’s debts, as a spouse may be affected when:
- One spouse is facing collection action or a lawsuit for unpaid debt or other liabilities
- One or both spouses are considering filing bankruptcy
- One spouse passes away
We’ve written before about liability for the debts of deceased family members, such as parents. In that situation, surviving family members are very rarely liable. But, with a spouse, it’s more complicated.
How Community Property Works in California
In California, most property acquired during the marriage is considered community property.
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The simplest way to think about it is that in the marriage, there are three property owners: Spouse A, Spouse B, and the community.
- Property owned by either spouse before the marriage remains the separate property of that spouse
- Property that is gifted to or inherited by one spouse during the marriage is considered separate property of that spouse
- Income that grows out of property owned by one spouse before the marriage or received as a gift or bequest, such as rent on inherited property or a profit of the property is the separate property of the spouse who owns the underlying property
Generally, all other property acquired by either spouse during the marriage becomes the property of the community. However, California couples may agree by contract that certain property that would otherwise be community property will remain separate property.
Here’s an example of how this mix of separate and community property might play out:
When Bob and June get married, Bob owns a hunting cabin and June has an investment account worth $40,000. After they marry, they open a joint bank account where both deposit their paychecks. June later uses funds from her paycheck that were deposited in the joint bank account to purchase a boat, which is titled only to her. June also buys an interest in a timeshare with funds from her investment account.
Unless the couple has made written arrangements to change ownership of the property:
- Bob owns the hunting cabin separately. If he later sells the cabin, the proceeds remain his separate property unless he commingles them (such as by depositing them in the joint bank account).
- June’s original $40,000 remains her separate property, along with any interest accrued on her original balance, unless she later adds funds to the account from community property or agrees to reclassify the account as community property.
- The joint bank account is community property.
- June’s boat is actually the community’s boat.
- June’s interest in the timeshare is separate property, so long as the investment account has remained separate property.
As you can see, this sorting out of separate and community property can be complicated. It’s often litigated in divorce cases, and it’s very important to understand it–or to work with an attorney who has a thorough understanding of it–if one spouse or the other is facing a debt collection lawsuit.
What about Debts Incurred During the Marriage?
Most debts incurred during the marriage are considered debts of the community. But, that doesn’t mean that debt incurred individually by Spouse A during the marriage becomes the responsibility of Spouse B.
Instead, Spouse A is individually liable for the debt and the community is liable for the debt–meaning that any property that is considered community property can be attached to satisfy the debt. As a practical matter, Spouse B’s income and other property acquired by Spouse B during the marriage may be fair game for creditors.
For example, Spouse B’s paycheck, deposited into a joint account, is community property and available (unless otherwise exempt) to satisfy debts Spouse A incurred during the marriage.
However, Spouse B generally has no individual liability for the debt. That means any property owned by Spouse B separately, such as property owned by Spouse B before the marriage, is generally not at risk in a collection action.
There are some limited exceptions to this rule.
For example, spouses in California owe each other a duty of support, so each spouse is individually responsible for debts incurred by the other for necessities.
Designating Property as Separate
California law allows married couples to change the classification of their property in several different ways. These include:
- Making community property the separate property of one spouse
- Making separate property of one spouse community property
- Making separate property of one spouse separate property of the other spouse
There are rules, though. The spouse who is giving up or sharing property must declare the intent in writing. A transfer may be voided if it’s determined to be fraudulent–for instance, if one spouse transferred separate property to the other specifically to put that property outside the reach of a legitimate creditor. And, property that has been designated separate may still be treated as community property if it is commingled with community property.
Special Community Property Issues in Bankruptcy
In bankruptcy, the issue of community property versus separate property can be complicated. If property has been designated separate by agreement, the bankruptcy trustee may see this as an attempt to protect property from creditors and may seek to unwind the transaction.
There are also situations in which a separate asset may be treated partly as community property. Imagine, for example, that Spouse A owned a vacation home prior to the marriage. However, there was an outstanding mortgage on the property, which was paid off during the marriage. In this situation, courts will typically apply a complicated formula to determine what portion of the property should be treated as community property. The best way to determine how your property will likely be treated in a Los Angeles bankruptcy is to talk with an experienced local bankruptcy lawyer.
Can One Spouse File Bankruptcy in California?
In California, as in non-community-property states, a married couple can file bankruptcy together or either spouse can file alone. The situation is a bit more complicated in a community property state, since community property becomes a part of the bankruptcy estate, even if only one spouse is filing.
That doesn’t mean no married Californian should ever file bankruptcy alone. Rather, the best approach for a specific couple will depend on a variety of factors, including how much of their property is community versus separate, and whether one spouse has a disproportionate amount of separate debt. The best way to make this determination is with the guidance of an experienced Los Angeles bankruptcy attorney, who can assess the best way to free yourself from debt while protecting the assets that matter most to you.
The attorneys at Borowitz & Clark have been helping people in and around Los Angeles resolve debt problems for decades. They offer free consultations to ensure that you have the information you need to make the right decision for you. To schedule yours, just call 877-459-3085, fill out the contact form on this site, or click in the lower right-hand corner to chat.