By Ryan C. Wood
In California and the other eight community property states in the United States separate property versus community property is an issue if you are married. Generally, separate property is property a spouse had at the time they were married or received by gift, bequest, devise, or descent. Separate property should be kept separate from community property to continue to be classified as separate property. There is a presumption that assets acquired during marriage are community property. It is possible to trace the source of an asset back to a separate property source. You have a problem though if you cannot clearly identify the source of the separate property.
In community property states you may also enter into a prenuptial agreement to make what would normally be community property separate property. You can agree with your future spouse that each of your incomes are not community property and will remain the separate property of you or your spouse. Again making sure to not commingle funds so there are no tracing issues. You may also designate a business or other asset as separate property in a prenuptial agreement. It is not very romantic, but there are practical reasons why one of you may want a prenuptial agreement prior to marriage.
I recently attended a 341 hearing where the person filing for bankruptcy protection chose poorly when selecting a bankruptcy lawyer. Their attorney did not understand the dynamic between community property and separate property when only one spouse files for bankruptcy protection. The petition failed to list the husband’s bank accounts, his vehicles or income. If you want the Chapter 7 trustee’s attorney to show up and ask questions this is how. The same petition failed to properly exempt the bankruptcy filer’s 401k account.
Only community property is liable for community debts (debts incurred during marriage), note the separate property of a spouse is not liable for community debts. If your spouse and you owe a significant amount of debt that was incurred during marriage, but one of you has significant separate property assets, you should think about only filing for bankruptcy in the spouse’s name that has no separate property. The separate property of your spouse will not be listed in the filing spouse’s petition because the separate property is not liable/available to community debts for repayment. The mistake in the case mentioned above is that all of their property was community property and should have been listed in the bankruptcy petition. These mistakes will most likely cost the bankruptcy filer dearly. They most likely were told that they did not have to list the money or assets not listed in the petition because they are separate property of the non-filing husband. This is just not true. Now they will have to provide months and months of bank account statements and the petition will be scrutinized even more than normal.
That is why I highly recommend anyone seeking the counsel of an attorney for any legal matter, especially bankruptcy, visit at least three different bankruptcy lawyers prior to retaining anyone’s services. You do not want to be part of what I had to listen to. This bankruptcy filer will now have to scramble to amend the petition and will most likely lose some assets to the bankruptcy estate.
See the following California Family Code sections regarding what separate property is.
California Family Code Section 770
(a) Separate property of a married person includes all of the following:
(1) All property owned by the person before marriage.
(2) All property acquired by the person after marriage by gift, bequest, devise, or descent.
(3) The rents, issues, and profits of the property described in this section.
(b) A married person may, without the consent of the person’s spouse, convey the person’s
separate property.
California Family Code Section 771
(a) The earnings and accumulations of a spouse and the minor children living with, or in the custody of, the spouse, while living separate and apart from the other spouse, are the separate property of the spouse.
(b) Notwithstanding subdivision (a), the earnings and accumulations of an unemancipated minor child related to a contract of a type described in Section 6750 shall remain the sole legal property of the minor child.
California Family Code Section 772
After entry of a judgment of legal separation of the parties, the earnings or accumulations of each party are the separate property of the party acquiring the earnings or accumulations.
