One of the greatest benefits that bankruptcy affords a non-filing spouse in California is the community discharge protection. When one spouse files for bankruptcy in California the non-filing spouse gets the benefit of a community discharge.
What is A Community Discharge?
In California a creditor cannot seek to collect from the after acquired community assets of both the filing spouse and the non-filing spouse. This means that if your husband/wife filed for bankruptcy and received a discharge then the creditors are not entitled to collect from any of the community assets. These creditors include any for which the non-filing spouse was liable to at the time of filing. The community discharge prohibits creditors from the non-filing spouse from collecting from community assets which may include wages, bank accounts, vehicles, and other personal property. The community discharge does not prevent a creditor from collecting the debt from non-filing spouse’s separate property. Separate property in California includes property acquired prior to marriage and property acquired during marriage by gifts, bequest, devise, or descent.
Although the community discharge does not remove the non-filing spouse’s personal liability for any debts that they are contractually obligated to pay, it operates as a protection during the existence of the marriage. As long as the non-filing spouse remains married they are for the most part protected from creditors touching the community property (for most couples this will be the marriage of their property). If a divorce or death occurs then the community protection no longer applies.
Why Does a Non-Filing Spouse Get This Benefit?
When either a husband or wife files for bankruptcy all of the community assets go into the bankruptcy estate and can be used to satisfy creditors claims. When a discharge is received Section 524 prohibits creditors with a community claim from seeking to collect on any community property acquired after filing for bankruptcy. To better comprehend how the community discharge works below is an example of how it operates:
Example: Richard and Amanda are married and reside in California. Richard has $40,000 in credit card debt in his name and Amanda has $10,000 in Medical bills in her name. Richard files for Chapter 7 bankruptcy in California and also lists Amanda’s medical bills. Amanda does not file bankruptcy with Richard. Richard receives a Chapter 7 bankruptcy discharge, and as a result of the discharge Amanda’s creditors cannot attempt to collect the debt from her community property. Richard and Amanda only have two vehicles that were acquired during marriage and a joint bank account. Assuming these are determined to be community assets, then Amanda’s creditors cannot seek to collect from these assets.
Many creditors do not comprehend how the community discharge operates and therefore may still seek to collect from the non-filing spouses community assets. I have found it useful to send the below reminder letter to any creditor who is unaware of the possible repercussions from seeking to collect on these debts:
On (Date of Bankruptcy Case Filing and Filing Spouse’s Name) filed for Chapter 7 Bankruptcy in California (Case No.). (Filing spouse’s name) received a Chapter 7 bankruptcy discharge on (date of discharge). As you are aware the discharge prohibits any attempt to collect from the debtor a debt that has been discharged. In a case involving community property: There are also special rules that protect certain community property owned by the debtor’s spouse, even if that spouse did not file a bankruptcy case. At the time of filing (Filing spouse’s name), was married to (Non-filing spouse’s name). The bankruptcy case for (Filing spouse’s name) listed all community assets as part of the bankruptcy estate. In this case the discharge operated as a community discharge where community claims were discharged for the non-filing spouse. Under Section 524 of the Bankruptcy Code, creditors of the debtor and the non-filing spouse who have a community claim on the date of the filing of the bankruptcy case are barred from asserting a claim against after acquired community property. The resulting Chapter 7 discharge operated as a community discharge of the community claim that (Name of creditor) held. Please be aware that an attempt to collect a discharged debt from the community property from the non-filing spouse violates the discharge and you may be required to pay damages and attorney’s fees to the debtor.