Community Property and
the Bankruptcy Estate
This discussion of community property is from “Overview of Arizona Divorce Principles for Bankruptcy Practitioners” by John McKindles
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Table of Contents
B. Separate Property
C. Liability for Debts of Spouse
Jurisdiction to Control and
Dispose of Community and Separate Property Assets
Jurisdiction to Determine
Separate Property Rights
Jurisdiction Over Allocation and
Disposition of Debt
ERISA Retirement Plans and the
Community Property and the
I. Priority of Past Due Support Over
J. Protection of Dissolution and
Advisability of Joint Bankruptcy
Filing and Conflict of Interest Problems
Impact on Future Community
M. Impact of Discharge on Secured
The debtor’s interest in community property is a
part of the bankruptcy estate, consonant with 11 USC §
541(a)(2). Also, please see Flexmaster Aluminum Awning Co., Inc. v.
Hirschberg (Ariz. App. Div.1 1992) 173 Ariz. 83, 839 P.2d 1128.
Further, the Bankruptcy Courts are compelled to look to the state property law in order to determine the
extent of the property which is to be included in the bankruptcy estate. In
Re Mantle, 153 F.3d 1083, Bankr.1.REP. (C.A. 9, 1998). The case goes on to
state that all community property not yet divided by a state court at the time
of the bankruptcy filing is property of the bankruptcy estate.
In the Flexmaster
case, a creditor brought a claim against both a husband and wife on the basis of
a debt incurred by the husband prior to marriage. The husband filed the petition
for bankruptcy. The wife moved for summary judgment, which was granted by the
court. The Court of Appeals reversed, holding that if the husband’s debt was
discharged in bankruptcy, no debt existed for which the community was liable;
but the creditor was required to include the non-debtor spouse in the action in
order to establish the limited liability of community property for the separate
premarital debt, since the non-debtor spouse’s interest in community property
essentially included the right to litigate both the premarital debt and the
value of the debtor spouse’s contribution to the community which might be
subject to collection. The court cited A.R.S. § 25215 in this regard.
Generally, property of the bankruptcy estate includes all community property of
the married couple, even if only one of the couple files for bankruptcy. The
only exception to this would be property which is otherwise exempt from
execution by creditors under the Arizona Homestead Exemption Statutes. A.R.S. §
33-1101 et seq. If both spouses file, each spouse is entitled to the
homestead exemption allowances in the full amount, except for the residence
The Bankruptcy Court
obtains jurisdictional authority to exercise administration, possession and
control over the whole of the community estate, not just the debtor spouse’s
one-half share of that estate, if only one of the couple files bankruptcy. The
non-debtor spouse essentially stands in the shoes of a creditor to the estate
and the Bankruptcy Code supersedes the statutory management and control
provisions of A.R. S. § 25-214, together with the automatic preliminary
injunction which is issued by the Superior Court at the divorce commencement.
Unless a “Lift Stay”
order is issued from the Bankruptcy Court specifically authorizing an action to
proceed, the divorce proceeding is stayed, with certain exceptions. The Superior
Court, once the stay has been lifted, resumes control over the termination of
the marriage, care, custody (officially termed "decision-making authority") and control of the minor children and the division
of exempt property. Any other ruling regarding property distribution and debt
allocation must necessarily abide the Bankruptcy Court’s jurisdiction and
termination of its control over those issues. As a practical matter, the
Superior Court judges will routinely place a divorce action on the inactive
calendar for dismissal once notification of the filing of bankruptcy has been
filed with the Superior Court.
Even if the “Lift Stay”
order is secured from the Bankruptcy Court, unless it holds otherwise, the
divorce court during the pendency of the bankruptcy proceeding does not
axiomatically receive authority to enter orders concerning any property of the
bankruptcy estate, including nonexempt community property of the bankruptcy
Certain exceptions to the
automatic stay include the collection of alimony, maintenance or support from
property that is not property of the estate and the commencement or continuation
of an action for establishment of paternity or modification of an order for
alimony, maintenance or support.
Any act taken in
violation of the stay subjects the acting party to sanctions under 11 USC §
362(h) and any orders entered by the Domestic Relations Court during this
pendency would be void. However, an action pending to enforce child support
which was pending at the time of filing bankruptcy is not stayed under 11 USC §
362(b)(2), except to the extent that access is sought to property of the estate.
earned by a Chapter 7 debtor are not property of the estate and consequently
the stay would not affect the enforcement of child support order against post
petition wages. However, there are some exceptions to this, regarding earnings
of certain professionals.
The automatic stay also
does not apply to prevent enforcement of pendente lite orders so long as
they are in the nature of support.
Again, the practitioner
may be compelled to do some persuading of the Family Court Judge to hear any
actions without obtaining a lift stay order, given the penchant by the Superior
Court toward simply shifting the case to the inactive calendar.
There is still some
question as to whether the debtor spouse may continue to pursue the Superior
Court Domestic Relations matter without first requesting Stay Lift.