Expert: Michael T. Hertz - 12/24/2011

Question
QUESTION: In a blog of 06-09-10 [http://en.allexperts.com/q/Bankruptcy-Law-909/2010/6/QUESTION-RE-COMMUNITY-DEBT.] a poster asked the following:

"Question:
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
Creditors in general cannot take advantage of 523(a)(15), which makes debts arising out of a divorce nondischargeable.  Only a spouse, former spouse, or child of the debtor can do so.

The creditor might go after the former spouse.  However, only the community property interests of the former spouse (which she had with the husband) could be subject to the claim.  Furthermore, there was a division of the community, and it is likely that that would insulate those assets.  I am not certain of this last point, though, and would need to do research.  (For instance, if the wife got the community property home in exchange for the business assets which the husband received in the divorce, could the creditor attempt to go after the home?  That has to do with fraudulent transfer issues and would require some  research).  However, as far as your question is concerned, the husband's discharge would protect him anything the wife earned divorce could not be gotten.:

I have a similar situation my wife and I executed a MSA two years ago in which the estate was divided exactly 50/50. Since I am retired and my only income is social security and retirement, I am looking into Chapter 7 to discharge certain creditor claims (that wife had nothing to do with) that have recently been brought (in last 60 days).  

I would like to know if you found more specific information from your research.

Thanks.

ANSWER: I have done no further research on that question.  Furthermore, since you are in Nevada, the law of that state may be different from that of California so far as marital property (Nevada is a   community property state, but its laws may well be different).

Also, you didn't say whether the debts arose pre-MSA property division or not.  Post property division debts would not be able to assert really that the division was fraudulent as to those.

If there was a division of property, then I would assume that you have some property (half of it).  If the property in your ex wife's hands has value, yours does as well.  How will that property be protected in bankruptcy?  If it is so protected, that probably means it has low value.  You did not mention this.  Similarly, if all else fails, your ex wife may have to file bankruptcy as well to protect her division from the creditors.

If the property has real value, I would certainly advise that you discuss this issue with an attorney in Nevada.

---------- FOLLOW-UP ----------

QUESTION: Actually, I reside in CA and the MSA was executed in CA. The 50% of assets I had at the time the MSA was drafted have since been liquidated, sold or transferred, thus by the time I file any BK, I would be past the 2-year lookback. The only assets I have are now exempt under the CA statutes. There were no claims at the time the MSA was executed. If BK will call into question any aspects of the MSA, then perhaps it would be better to just leave things as is?

Answer
Actually, since the trustee can use state fraudulent conveyance law, the statute of limitations in  bankruptcy is a lot longer than 2 years.  But there would have to be at least one debt that predates the transfer (that is, the MSA).  It could be a very small debt ($3.50 for example), and trustee could try to use that debt to use as the basis of his complete -- because of the the very strange case law.  In this area.  Carefully review your debts and make sure that there is none that predates the SMA.  (Make sure that you check the credit card debts, and when you do the schedules and date the debts, make sure that they are all recent.  Pay off any that are too old.  That should solve you problem, because then the trustee cannot use the Cal. fraudulent transfer law effectively.