DIVORCE AND BANKRUPTCY

Impact on Future Community Property Interests

This discussion of community property is from “Overview of Arizona Divorce Principles for Bankruptcy Practitioners” by John McKindles

March 2003

John McKindles

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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

Future community property interests will not be liable for debt discharged in bankruptcy. See Flexmaster Aluminum Awning Co., Inc. v. Hirschberg, infra.

As to other “future” community property interest or as yet unvested community property interest, 11 USC §541 incorporates certain possible future interests within the bankruptcy estate under subparagraph 5.

Section 541 states, in relevant portions, as follows:

(a)The commencement of a case under sections 301, 302, or 303 of this title creates an estate. Such estate is com­prised of all the following property, wherever located and by whomever held.

(2) All interests of the debtor and the debtor’s spouse in community property as of the commencement of the case that is ... (A) under the sole, equal, or joint man­agement and control of the debtor, or (B) liable for an allowance claim against the debtor, or for both an al­lowable claim against the debtor and an allowable claim against the debtor’s spouse, to the extent that such in­terest is so liable.

Further relevant to the community property issue is subparagraph 5, which states:

(5) Any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the peti­tion, and that the debtor acquires or becomes entitled to acquire within 180 days after such date ... (A) by bequest, devise, or inheritance, (B) as a result of a property settlement agreement with the debtor’s spouse, or of an inter­locutory or final Divorce Decree ...

An example of the type of asset covered by the 180 day rule is a debtor’s interest in a de­ceased spouse’s life insurance policy, which interest was acquired within 120 days after the com­mencement of her Chapter 7 case. This was not an unliquidated claim and thereby was an asset of the estate. In Re Pettigrew, Bkrtcy. E.D. MO. 1990, 115 B.R. 214.

At least one court has interpreted the 180-day rule as intended for the benefit of the debtor, not creditors, as having its obvious purpose the exclusion from the estate certain property acquired by the debtor after the bankruptcy was filed. In Re Clark, Bkrtcy. S.D.FLA. 1982 26 B.R. 263.

See also In Re Vassilowitch, Bkrtcy. D.MASS. 1987, 72 B.R. 803, in which a divorce decree was entered prior to the debtor’s filing of a Chapter 7 Bankruptcy Petition. The Decree provided that the marital home would remain in joint names of the spouses and, upon sale, the non-debtor spouse would receive two-thirds of the proceeds and the debtor spouse only one-third. The court ruled that only one-third interest in the proceeds became property of the estate.

Closer to home, however, the Bankruptcy Court in California held that where one of the spouses filed bankruptcy after the dissolution of the marital status but prior to the division of the couple’s community property, the “debtor spouse” under the code was broad enough to include the debtor’s former spouse so that all the community property then existing of the couple became property of the bankruptcy estate. M Re Hiller, Bkrtcy. C.D. Cal. 1994. 167 B.R. 202. However, see also In Re LaNess, Bkrtcy. C.D. Cal. 1993. 1-59 B.R. 916. In this case, the parties had been divorced for two years prior to the debtor spouse filing bankruptcy. The community property had not yet been divided pursuant to the terms of the decree that called for an approximately equal split of the community property. In that case, the court held that the term “spouse” as used in the statute was not broad enough to include the former spouse from whom the debtor had been divorced for approximately two years when the petition for bankruptcy was filed.