Community Property and Bankruptcy Laws

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Community Property Defined

Community property can be defined as a marital property system providing for the creation of a marital estate whereby the assets included in the estate are managed and jointly owned by the individuals married.

The marital property regime, or community property, has been established in civil law in some states in the United States and is associated with common law in other states. The idea of community property carries the idea of equal asset ownership.

Non community property states attempt to divide up the assets of the marital estate depending on who made the contributions of the assets to the estate. Ideally, each asset found in a non community marital regime can be determined as to who owns the property in the case of a divorce within the marriage.

Whether of not a marriage is a community property marriage or a non community property marriage has an influence of the bankruptcy process if either or both of the marital participants file for bankruptcy.

Authority in Dealing with Community Property and Bankruptcy

Federal bankruptcy laws are the primary source of authority for filing a bankruptcy, but the federal laws cannot supersede state community property laws after the fact. A decree made by a state judge on community property cannot be overridden by a decree of a federal bankruptcy judge if the state judge made the decision prior to a client filing bankruptcy or was not privy to the bankruptcy.

An Illustrated Event Where Both Laws Collide

An example of that actually happening recently occurred when a wife was awarded the non community property of the car which was in the husband’s name. The husband still owed money on the car.

The husband, who didn’t challenge the divorce, filed for Chapter 7 bankruptcy protection before the divorce decree went forward. The divorce court was not aware of the where the husband was when notification of the decree went out. The bankruptcy judge was not aware of the divorce decree, and when the bankruptcy closed, the debt on the automobile was discharged.

Unfortunately for the filing husband, the divorce court judge found him in contempt of court when he failed to make the discharged payments for the car. It is at this point the husband began learning the process on the order of events. The wife had kept the car, and it was in the state in which she filed divorce. The wife thought the husband would pay for the car since she won it in divorce court, and the husband thought the loan on the car was discharged in bankruptcy. An arrest warrant was sent out for the husband in the state the wife resided.

What About The Third Party?

On top of that to complicate matters further, neither courts gave consideration to the lien on the vehicle. Liens are not discharged in bankruptcy, and the lien holder had the right after the bankruptcy closed to repossess the car, the true owner.

On the other hand, it would be interesting to see how it eventually played out concerning how the divorce court judge handled the lien.

When Laws Get Complicated, Get you a Bankruptcy Lawyer

When you mix community property with bankruptcy, the laws get complicated. That is why it is wise to have a bankruptcy lawyer on your side when you file such a complicated case.

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