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.