DIVORCE AND BANKRUPTCY

Community Property
and Divorce

This discussion of community property is an excerpt from “Overview of Arizona Divorce Principles for Bankruptcy Practitioners”

March 2003

John McKindles

Learn more about Mr. McKindles's
Divorce and Family Law practice

Table of Contents

A. Community Property

B. Separate Property

C. Liability for Debts of Spouse

D. Jurisdiction to Control and Dispose of Community and Separate Property Assets

E. Jurisdiction to Determine Separate Property Rights

F. Jurisdiction Over Allocation and Disposition of Debt

G. ERISA Retirement Plans and the Bankruptcy Estate

H. Community Property and the Bankruptcy Estate

I. Priority of Past Due Support Over Other Creditors

J. Protection of Dissolution and Lien Rights

K. Advisability of Joint Bankruptcy Filing and Conflict of Interest Problems

L. Impact on Future Community Property Interests

M. Impact of Discharge on Secured Debts

Barring an express intent of the parties to a marriage to consider their property differently, the law generally covering community property under the marital and domestic relations statute is A.R.S. § 25-211, which states:

25-211. Property acquired during marriage as community property, exceptions. All property acquired by either husband or wife during the marriage is the community property of the husband and wife except for property that is (1) acquired by gift, devise or descent or (2) acquired after service of a petition for dissolution of marriage, legal separation or annulment if the petition results in a decree of dissolution of marriage, legal separation or annulment.

A.R.S. § 25-211 was amended in 1998, essentially adding the subsection 2 above. While subsection 2 may have clarified the point at which the community terminated, it raised its own questions regarding affixing valuation to community assets at the time of service of such a peti­tion, particularly where such assets experienced volatile fluctuations in value after that time.

Further, once the presumption that an asset exhibits a community nature affixes, the burden to disprove this presumption is quite high. Case law holds that this presumption can be rebutted only by nearly conclusive evidence. Kennedy v. Kennedy (1963) 93 Ariz. 252, 379 P.2d 966. Further case law adds that as long as there is any doubt, the property acquired during the marriage must be presumed to be community property. Porter v. Porter (1948) 67 Ariz. 273, 195 P.2d 132.

The burden of overcoming, by clear and convincing evidence, the presumption that a debt incurred or an asset acquired by a married person during the marriage is a community obligation or asset, is on the party who contends a separate nature thereto. Hofmann Co. v. Meisner (App. 1972) 17 Ariz. App. 263, 497 P.2d 83.

1. Funds. When separate and community funds are mingled, commingled funds are pre­sumed to be community property and the burden is on the person claiming a separate nature, and that burden is by clear and convincing evidence. Rundle v. Winters (1939) 38 Ariz. 239. 298 P. 929, Cooper v. Cooper (1981) 130 Ariz. 257, 635 P.2d 850.

This presumption applies to the extent that the funds are so commingled that isolation of the funds between separate and community is impracticable. Under those circumstances, the whole account would be considered community funds. Evans v. Evans (1955) 79 Ariz. 284. 288 P.2d 775. Cooper v. Cooper (1981) 130 Ariz. 257. 635 P.2d 850.

However, as long as the funds remain traceable, the commingling of separate and community funds into a single account does not necessarily transmute the entire account into a com­munity asset. If these funds remain traceable and distinctive from the community funds, the law will not presume an intent by the owner of separate funds to make a gift of one-half of those funds to his or her spouse. Noble v. Noble (App. Div. 1 1976) 26 Ariz. App. 89, 546 P.2d 358.

Property acquired by a party prior to marriage retains its separate nature after marriage, although that status can be altered by an agreement between the spouses. Sellers v. Allstate Ins. Co. (1976) 113 Ariz. 419, 555 P.2d 1113. Further, property acquired after marriage that is in exchange for separate property owned before marriage retains its separate nature. Borne v. Lord (App. Div.2 1973) 19 Ariz. App. 228. 506 P.2d 268.

The parties are certainly free of course to modify or completely eliminate their respective rights to community property through a premarital agreement. Elia v. Pifer (App. Div.1 1998) 194 Ariz. 74. 977 P.2d 796. Further, a valid premarital agreement that does so precludes a creditor of one spouse from proceeding against the separate property of the other spouse, even on a claim that arose during the marriage. Elia v. Pifer, Id.

2. Real Property. One of the vagaries of Arizona law as it relates to community property is that property acquired by husband and wife with community funds during the marriage in­volves real estate taken by the parties as Joint Tenants with Right of Survivorship. Normally Joint Tenancy with Right of Survivorship has been a popular method for a married couple taking title to real estate in Arizona. Interestingly, under Arizona law when the husband and wife take title to property as joint tenants, this counters the presumption that the property is community and consequently the joint tenancy status relegates to each spouse his or her separate property interest therein. In re Murin, Bkrtcy. D. Ariz. 2002. 283 B.R. 588; Ferree v. City of Yuma (App. Div.1 1979) 124 Ariz. 225, 603 P.2d 117.

Although the courts in Arizona treat such property the same as community property for purposes of dissolution of marriage, there is another form for taking title that is becoming more popular in Arizona - Community Property with Right of Survivorship. Although this form of taking title has gained in popularity, its popularity is mainly a result of its tax treatment. As more of this type of interest by the parties in their real property grows, you will likely see less of a technical concern about separate funds enhancing joint tenancy property. Further, A.R.S. §25-318 addresses the distribution rights in joint tenancy property for married persons upon dissolu­tion by directing that the court divide the community, joint tenancy and other property held in common equitably, though not necessarily in kind, without regard to marital misconduct. This statute further incorporates as community property any property acquired by either spouse out­side of Arizona if the property would have been community property if acquired in Arizona.

3. Gifts. The gifting exception to A.R.S. § 25-211 generally becomes a practical issue only if the value of the gift is substantial. Jewelry that has been acquired during coverture is pre­sumed to be community property and a spouse seeking to dispute that presumption again has to demonstrate the separate nature of the property by clear and convincing evidence. Hrudka v. Hrudka (App. Div,. 1 1995) 186 Ariz. 84, 919 P.2d 179.

4. Personal Injuries. Recovery for personal injuries incurred during coverture is con­sidered separate property to the extent that the recovery does not include a claim for lost wages, which would be considered community property. Hatcher v. Hatcher (App. Div. 1 1996) 188 Ariz. 154, 933 P.2d 1222. Another aspect of a personal injury claim that may be compensated is reimburse­ment for expenses for hospital and medical care. Such losses and expenses are injuries to the community and recovery for those items normally belongs to the community. Jurek v. Jurek (1980) 124 Az. 596. 606 P.2d 812.

5. Improvements to Property. So long as the land itself retains its nature as separate property, any improvements by the other spouse or by the community to that property does not convert the nature of the interest in the property from separate to community, but simply allows a claim for reimbursement of the expended funds. Bourne v. Lord, Id., Kingsbery v. Kingsbery (1963) 93 Ariz. 217, 379 P.2d 893: Rothman v. Rumbeck (1939) 54 Ariz. 443. 96 P.2 755. In one case, the court held that to the extent that the spouse’s community efforts to improve his own separate real property, in­creased the value thereof, any such increase in the value occasioned thereby would be commu­nity property. Potthoff v. Potthoff (App. Div.1 1981) 128 Ariz. 557. 627 P.2d 708. The obvious difficulty would be both in establishing the relative value of the unimproved property prior to the spouses’ community efforts in improving its value and the impact of other market economic factors.

6. A.R.S. § 25-217. What about property that is acquired in Arizona during the marriage by persons married outside of the state who eventually move into Arizona? Resort to case law is unnecessary in this fact scenario since A.R.S. § 25-217 specifically addresses the fact that such property will be controlled by the laws of Arizona.