California Court Discusses Characterization of Marital Property in Bankruptcy Cases

In many marriages, couples jointly own real estate. While couples may not consider the nature of the title of a property, in the context of bankruptcy, how a jointly owned property is characterized is a critical consideration for determining whether it will become part of the bankruptcy estate. The factors weighed in determining whether an asset is community property or is held in a joint tenancy was recently discussed by a California bankruptcy case in which the court disputed how two marital properties should be categorized. If you are married and wish to seek debt relief via bankruptcy, it is prudent to speak with a seasoned California bankruptcy attorney to discuss how the property you own with your spouse may be impacted.

Background of the Case

Allegedly, the debtor, who was married, filed for Chapter 7 bankruptcy. Prior to filing the petition, the debtor transferred properties he owned with his wife to a trust. A trustee filed an adversary proceeding, asking the court to avoid the transfer because it was a fraudulent conveyance. The court ruled in favor of the trustee and ruled that the entirety of both properties could be recovered for the bankruptcy estate, rather than just the debtor’s halves. The debtor then appealed, but the lower court ruling was affirmed. The debtor then appealed again.

Characterization of Marital Property in Bankruptcy

Under California law, if a debtor owns a property in a joint tenancy, only the debtor’s interest will become the property of the bankruptcy estate. Further, the bankruptcy code allows a trustee in a Chapter 7 bankruptcy to sell a jointly owned property and divide the proceeds between the non-debtor owners and the bankruptcy estate. If a property is considered community property, however, the entire property will become an asset of a bankruptcy estate. In such instances, the trustee can sell the property and distribute the entirety of the proceeds among the debtor’s creditors.

In the subject case, the court noted that there was a conflict as to how property should be characterized between California Evidence Code 662 which characterized property based on the form of title, and California Family Code 760, which presumed that property purchased during the marriage was community property. Ultimately, the court ruled that the answer to how property should be defined depended on when the property was obtained.

In other words, if a joint tenancy was acquired before 1975, each spouse’s interest in the property would be separate. If a property was purchased with community funds after 1975, though, it would be presumed to be a community asset. Based on the foregoing, the court found that the bankruptcy court properly characterized one of the debtor’s jointly owned property but failed to conduct the analysis necessary to properly define the nature of another property.

Confer with an Experienced Bankruptcy Attorney in California

Many assets can become part of a bankruptcy estate, including property a debtor owns with a spouse, and it is critical for anyone considering filing for bankruptcy to speak to an attorney to discuss their options. Matthew D. Roy is an experienced California bankruptcy attorney, and if you are seeking debt relief, he can advise you of how bankruptcy may affect your jointly and separately owned assets. You can reach Mr. Roy at (916) 361-6028 or via the form online to schedule a consultation.