Expert: Mark J. Markus- California Bankruptcy Attorney - 6/9/2010

Question
Hello Mr. Markus:   I thank you in advance for answering my question.  Here are the facts:

In California husband and wife are married at all relevant times and in California.
Husband starts a business with several others (not the wife) during the marriage and incurs debt both in the name of the LLC and he personally guarantees the corporate debt (which incidentally is cross collateralized with other accounts the husband has with the particular creditor).  Wife has nothing to do with the business and wife does not sign anything.

Husband and wife get divorced and divorce Marital SEttlement AGreement awards husband both the assets of the corporation and any debt associated with the particular careditors accounts.

IF husband alone files an individual chapter 7 (there are virtually no assets in the company that the husband owns), can the creditor claim that the debt is nondischargeable claiming that the debt arose out of the divorce decree?  Does a creditor usually go after a wife in this circumstance, in ay event?  Even if it were technically nondischargeable, on these facts is it likely that the creditor would challenge the dischargeability of the personal guarantee (it is very possible that the creditor doesn't even know the husband was once married)?

Thank you for your assistance and volunteering your time.

Answer
The marital settlement agreement does not affect the relationship between the creditors and either husband or wife.  It is only effective as between the husband and wife.  Thus, a non-spousal creditor cannot claim a debt is non-dischargeable because it was awarded in a marital settlement to one spouse or another.   One of the spouses might be able to argue that against the other spouse, but not a non-marital creditor.

Technically, (and I give my normal disclaimer that I am NOT an expert on community property issues), any debt incurred during the marriage is debt that the community is responsible for.  So, the wife in your fact scenario would be responsible for the husband's debts regardless.  (ex)Husband filing a bankruptcy does not affect (ex)wife's liability at all.  However, as you sort of allude to, the chances of one of H's business creditors coming after W, particularly post-marriage, is pretty slim, albeit possible.

W, however, would have a non-dischargeable claim against H in H's bankruptcy case for the amounts H was supposed to deal with as part of the marital settlement agreement, so potentially W can continue to pursue H to get him to pay or reimburse her for anything she has to come up with as a result of his filing bankruptcy on those debts. (This assumes, as you state, that H files a Chapter 7 case.  In a Chapter 13 it may be dischargeable)

Hope this answered your questions.

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