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Can pre-marriage separate debts of the non-filing spouse be discharged, via the community discharge?
Some attorneys say “yes” and others “no”.
25-215. Liability of community property and separate property for community and separate debts
A. The separate property of a spouse shall not be liable for the separate debts or obligations of the other spouse, absent agreement of the property owner to the contrary.
B. The community property is liable for the premarital separate debts or other liabilities of a spouse, incurred after September 1, 1973 but only to the extent of the value of that spouse’s contribution to the community property which would have been such spouse’s separate property if single.
C. The community property is liable for a spouse’s debts incurred outside of this state during the marriage which would have been community debts if incurred in this state.
D. Except as prohibited in section 25-214, either spouse may contract debts and otherwise act for the benefit of the community. In an action on such a debt or obligation the spouses shall be sued jointly and the debt or obligation shall be satisfied: first, from the community property, and second, from the separate property of the spouse contracting the debt or obligation.
In Schilling v. Embree , 118 Ariz 236, 575 P2d 1262 (App. 1977), the court of Appeals held that this language subjects community property only to pre-marital separate debts, not separate debts incurred during marriage.
25-214. Management and control
A. Each spouse has the sole management, control and disposition rights of each spouse’s separate property.
B. The spouses have equal management, control and disposition rights over their community property and have equal power to bind the community.
C. Either spouse separately may acquire, manage, control or dispose of community property or bind the community, except that joinder of both spouses is required in any of the following cases:
1. Any transaction for the acquisition, disposition or encumbrance of an interest in real property other than an unpatented mining claim or a lease of less than one year.
2. Any transaction of guaranty, indemnity or suretyship.
3. To bind the community, irrespective of any person’s intent with respect to that binder, after service of a petition for dissolution of marriage, legal separation or annulment if the petition results in a decree of dissolution of marriage, legal separation or annulment.
Both spouses must be named in an Arizona lawsuit to obtain a judgment which is collectable from any portion of the community property. The non-liable spouse is entitled to litigate two issues: 1. The whether the other spouse is in fact liable, and 2. The other spouse’s contribution to the community. Flexmaster Aluminum Awning Co. v. Hirschbert, 173 Ariz. 83, 839 P.2d 1128 (App. 1992). Flexmaster involved a premarital debt.
Beware that, as with many areas of law, lawyers will disagree about the applicability of these statutes to certain factual situations.
Community Discharge received in bankruptcy:
Subsection (a) of 11 U.S.C. §524(a)(3) addresses the split discharge, when only one spouse attains a discharge in bankruptcy, in community property states. The legislative history of this section says that “if community property was in the [bankruptcy] estate and community claims were discharged, the discharge is effective against the community creditors of the nondebtor spouse as well as of the debtor spouse. House Report No. 95-595, 95th Cong., 1st Sess. 365-6 (1977), Senate Report No. 95-989, 95th Cong., 2d Sess. 80 (1978). § 524(a)(3) treats the effect on the nondebtor spouse of a discharge of a debtor in a community property state when the nondebtor spouse is liable on the community claim, but has not filed a bankruptcy petition. That is, if one spouse in a community property state has commenced a bankruptcy case where, as here, no claim is excepted from the debtor’s discharge and is not otherwise found to be nondischargeable, and if the nondebtor spouse would not have had a claim excepted from her discharge in a hypothetical case commenced on the same day as the commencement of the debtor’s case, then the creditors of either spouse holding community claims on the date of bankruptcy are thereafter barred from asserting claims against after acquired community property. It was the duty of the scheduled creditors in the Braden Jay Karber bankruptcy proceedings to object to the hypothetical discharge of Valerie Karber, as the nondebtor spouse, within the same time limits as their objections to the discharge of Braden Jay Karber. 11 U.S.C. § 524(b). No such objections were filed and thus all community creditors before the Court in that case are now barred from seeking to collect their deficiencies from the after acquired community property of either Braden Jay Karber or Valerie Karber. In re Karber 25 B.R. 9, 12 (Bkrtcy.Tex.,1982) See also In re Dyson 277 B.R. 84 (Bkrtcy.M.D.La.,2002)
Community Guardian Bank v. Hamlin, 182 Ariz. at 629, 898 P.2d at 1007. A creditor obtained a default judgment against the wife for unjust enrichment based on her husband’s unauthorized use of funds for the benefit of the community. In determining whether the creditor could garnish the wife’s post-dissolution earnings, we found that the default judgment established a community obligation for which the wife was jointly liable. Id.at 630-32, 898 P.2d at 1008-10. Applying Arizona law, the court held that the former spouses remained jointly liable for the community debt after their divorce, and therefore the creditor could garnish the wife’s post-dissolution wages.Id. at 631, 898 P.2d at 1009.
Question: Creditor has a judgment against a debtor. The judgment does not name debtor’s wife. It isn’t clear whether the debt from the judgment was a community obligation or not. Regardless, the wife was not named in the judgment. Creditor is trying to go after the wife’s separate property. Is there a statute or case that says that even if the debt is a community debt (again, not clear if it is or not), the creditor can’t go after the separate property of the spouse who is not named in the judgment?
Answer: Yes. See ARS 25-215(A) and (D). In fact, the judgment creditor cannot even go after the community property. Both spouses must be joined as defendants in the lawsuit before a creditor can obtain and execute on a judgment against the marital community and community property. ARS 25-215(D) (“[I]n an action on [a debt against the community] the spouses shall be sued jointly….”) Additionally, see Flexmaster v. Hirschberg, 173 Ariz. 83 (1992) and the law cited therein. Similarly, the non-debtor spouse is a necessary and proper party in a suit to establish the limited liability of the marital community for the separate, premarital debt of the other spouse. Flexmaster v. Hirschberg, supra.