community property

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I have already written about discharging student loans in bankruptcy.  As I discussed in that previous blog post, although under special circumstances it is possible to discharge them, it is devilishly hard.

I recently came across an interesting twist on student loans in the bankruptcy context that I thought might interest you.  The setting:  A debtor wants to file for Chapter 7 bankruptcy protection.  The nonfiling spouse died prior to the bankruptcy filing, and left a large student loan debt, for which the debtor did not cosign.  What happens to the student debt?  What happens to the deceased spouse’s other debts?  Can the creditors attach heaven’s streets of gold to satisfy the debts?

I.   Community Property/Community Debt

If you live in a community property state such as California, you can have some liability for your spouse’s debts.  Why?

A.  Dividing The Marital Assets

When a couple gets married in a community property state, all of the assets are divided into three categories:  The husband’s separate property, the wife’s separate property, and the community property.  How is this done?  In the absence of a prenuptial agreement, community property consists of all assets except those assets with which a spouse enters the marriage, those assets a spouse inherits, and the offspring of such assets.  See Cal. Fam. Code § 770.  A moment’s thought reveals that community property must include post-wedding day wages, and anything purchased with those wages, because the wage earner didn’t enter the marriage with the wages or the stuff bought with the wages, and didn’t inherit them.

By default then, a spouse’s separate property is comprised of those assets that that spouse enters the marriage with, anything that spouse inherits, and the offspring of those assets.

Why do we care about this asset taxonomy?  There are two contexts in which this breakdown is important.
Continue Reading Death And Student Loans

I recently fielded a question from a fellow bankruptcy attorney.  The question raised some interesting factors to consider when preparing a set of Chapter 13 bankruptcy papers.  First here is an edited version of the question:

Debtor only has $2,500 in credit card debt.  He has $120,000 in student loan debt and wants to do a chapter 13 to get some breathing room on the monthly student loan payments.  On Form 22C his disposable monthly income (DMI) is very high:  $2,800.  This is purely theoretical and includes his wife’s income, who will not be filing.  He doesn’t actually have that kind of disposable income.  My question is:  if we propose to pay 100% of the non student loan unsecured debt ($2,500), do we have to still pay the equivalent of $2,800/month for 60 months (which would all go to the student loans)?  Are student loans considered as part of the “general unsecureds” for the purpose of this calculation?   Although student loans are not currently dischargeable, we are not allowed to give them priority payments; but can we pay them less than DMI x 60?  Are we able to designate that certain payments go to principal?  Does the nonfiling spouse’s income HAVE to be considered when the plan is really meant to pay down the separate student loan debt of the filer husband?  She’s not liable on this debt as it was incurred before marriage.

For your edification, here is my response:
Continue Reading Chapter 13 Bankruptcy; Student Loans; Community Property Income