Modern Family Matters

What Community Property Is & How It Impacts Family Law and Bankruptcy Cases

April 19, 2022 with Michael Reid Season 1 Episode 53
Modern Family Matters
What Community Property Is & How It Impacts Family Law and Bankruptcy Cases
Show Notes Transcript

Join us as we sit down with Pacific Cascade Family Law attorney, Michael Reid, to talk about how community property plays a role in family law and bankruptcy cases. In this interview, Michael answers the following:

•    What Does It Mean That Washington Is a Community Property State?
 •    What Is Community & Separate Property, and How Do They Differ?
 •    Can Separate Property Ever Become Community Property?
 •    Can Our Property Be Community Property If We’re Not Married?
 •    How Are Community and Separate Property and Debts Divided in A Divorce?
 •    Will The Court Just Split Our Community Property 50/50?
 •    Do I Get All of My Separate Property Back After a Divorce?
 •    When Is Community Property Given to The Other Spouse in a Divorce Or Bankruptcy?
 •    What Happens If My Spouse Files a Bankruptcy in Washington?
 •    Does a Prenup Overrule Community Property Laws?
 •    What Happens When an Ex-Spouse Does Not Pay the Community Property Debts?
 •    How Do Community Property Laws Affect Filing for A Bankruptcy? 

If you would like to speak with one of our family law attorneys, please call our office at (503) 227-0200, or visit our website at

Disclaimer: Nothing in this communication is intended to provide legal advice nor does it constitute a client-attorney relationship, therefore you should not interpret the contents as such.

Welcome to Modern Family Matters, a podcast devoted to exploring family law topics that matter most to you. Covering a wide range of legal, personal, and family law matters, with expert analysis from skilled attorneys and professional guests, we hope that our podcast provides answers, clarity, and guidance towards a better tomorrow for you and your family. Here's your host, Steve Altishin.

Steve Altishin  0:31  
Hi, everyone. I'm Steve Altishin, Director of Client Partnerships here at Pacific Cascade Family Law, and today I'm here with Attorney Michael Reid to talk about what community property is and how it impacts a family law or bankruptcy case. So Michael, before we get started, can you tell us a little bit about yourself?

Michael Reid  0:52  
Sure, Steve, thanks. I am a Washington and Oregon attorney. I've been working with Pacific Cascade now for just a few months, and prior to that I had my own law practice practicing family law and bankruptcy. Prior to that, I was in-house counsel for a large utility for several years, and I enjoy playing the piano. Is that enough?

Steve Altishin  1:17  
That is more than enough. I enjoy listening to the piano, but no one ever leaves me sing with it, because my voice is not, I guess, what they call good. So today we're talking about community property. Washington is what they call a community property state. So let's just start with the obvious question. What is community property?

Michael Reid  1:42  
Okay, so, there are eight states that are community property states, from Louisiana, Texas, New Mexico, Arizona, California, Nevada, Idaho and Washington. And if you're in one of these eight states, then the rule is all of the assets and debts that you acquire during a marriage belong to both parties of the marriage; that's all that community property means is that everything is community property, without having to say that it's community property. Other states are separate property states. And so it's not necessarily community property.

Steve Altishin  2:21  
And I take it we're not just talking about, in a sense, how they're split in a divorce or something like that, but they are actually held, or considered be held, as an ownership by both of the of the spouses. 

Michael Reid  2:38  
Yeah, that's right. Yeah. And it usually comes up as an issue in family law cases. That's generally where we're going to see that it could come up, it does come up as well in bankruptcy cases. And we'll talk a little bit about that. But it could also come up in say, a consumer case where a creditor is trying to get money from one partner, well then you've got to consider whether it's community or not.

Steve Altishin  3:06  
Yeah. Just to get it straight on my end, you said couples who are married-- do they have to be married? Doesthe Washington registered domestic partner count as married, or just plain old domestic partners, or just people who live together?

Michael Reid  3:28  
Yeah, they do. And in fact, in Washington, the domestic partnership, it was altered. I think it was in 2014 that the law was altered so that anybody who was already in a domestic partnership as a same sex domestic partnership automatically got converted to a marriage. So all of the rules apply to both. It also can apply even if you're not married or in a registered domestic partnership. We have in Washington, we don't have what's commonly called a common law marriage. Instead, we have a CIR, committed intimate relationship. And if you're involved in a committed intimate relationship with the guise of being marriage-ish, then the community property rules can apply as well.

Steve Altishin  4:24  
Got it. Okay, community property, owned by the spouses. And what about the other property? I think they call that separate property-- how do you know if it's separate property?

Michael Reid  4:39  
Yeah, you're gonna want to have some things that are separate and there are some things that are not community, they don't fall under that community property umbrella, Anything that was owned by-- and I'm talking about property, but it's also going to be important that debts also apply as community. But we're gonna focus here on community property. So anything that was owned by one partner prior to the marriage continues to be owned by that partner throughout the marriage, and there are ways that something that is separate property can become community property. And in fact, the laws tend to push things toward that community property. So we can talk about that as well. Anything that is inherited, is separate property. If somebody receives something because of a disability, then that will be considered separate property as well. But again, all of these things can become community property, even if it's not intended to.

Steve Altishin  5:44  
Got it. And so I imagine that the community debt that you talked about follows the same sort of rules?

Michael Reid  5:53  
Yeah, it does. So if you have debt prior to marriage, that's going to be your debt, it's not going to be your spouse's debt. If you acquire debt during the marriage, it belongs to both of you, you are both responsible for that debt. Now, how creditors deal with that can be a little tricky. They don't want to go in and determine what is separate and what is community. So they're going to assume that whoevers name is on that debt is the person who has that debt. But there is still that possibility that they might reach in and say, okay, but you're married, and so therefore, the other person is responsible.

Steve Altishin  6:33  
Wow, that's a twist. I mean, in Oregon, that's a twist.

Michael Reid  6:40  
Yeah, it could happen. But again, it probably won't. What you have on your credit report is what your debt is, and what your spouse has on their credit report is their debt. And the creditor--and this is why I say this-- the creditors probably are not going to reach in and say, Well, we're going to tie these together. And now we're going to go into bankruptcy, because if one spouse gets a discharge from debt in bankruptcy, then they are discharged for all of their creditors, regardless of who they are, whether they're listed on their credit report, or if they're their spouses debt, through community. But that's if only one person gets a discharge. If both get a discharge, then they're going to discharge for everything. But what's interesting about community debt and bankruptcy is something kind of uncommonly referred to as a phantom discharge. Because what happens is, one person gets a discharge, but the other person doesn't. In order for a creditor to collect from the person who did not get a discharge, they're going to have to reach in to what ultimately is community property in order to pay that debt. And because that community property belongs to both parties, they would be reaching into say, wages or seizing accounts in a bank. And since that belongs to the person who has been discharged, that would be a violation of the bankruptcy discharge. And so they tend not to go after a spouse who has has not been discharged.

Steve Altishin  8:22  
Staying in bankruptcy, that's just brought up another question. Let's say, you know, I and my spouse have property. Only I filed the bankruptcy, and the bankruptcy debtors were talking and talking and I say, Well, why don't I just sell you my car? Or why don't I give you this or give you that? And they say, Okay, I'll take it. I mean, I imagine you can't sell community property or transfer a deed to community property just willy nilly.

Michael Reid  8:56  
Yeah, the rules apply strictly to real property. One spouse is not allowed to transfer real property without the consent of the other spouse. So real property, like I say, is pretty strict with vehicles. It depends on who's on the title, and you may or may not have somebody on the title. And that may or may not reflect the community property, the nature of the of the asset. Yeah. And that, again, comes back to, where does this generally apply? It applies in bankruptcy, it applies in family law. And we're really going to look at it at the end of a marriage. We're going to look at who owns what, and who owns what prior to the marriage so that we can determine who can transfer what and who can continue to own things.

Steve Altishin  9:48  
Okay, let's do that. Let's move to divorce and community property and separate property and community debt and separate debt-- how the heck is that viewed in a divorce? Are there presumptions, and where do they start at when they start to look at that?

Michael Reid  10:06  
So because it's community property, the judge is going to start by assuming that everything that's owned is community property. You're pretty much gonna have to prove that something is your separate property, and that can be tricky. Because if, let's say that you receive an inheritance during the marriage, it doesn't matter if it's before or during the marriage, an inheritance is going to be your separate property. You get a check, you put that check in the bank, and then you spend off of it, or you save it, whatever you're going to do with it. When you put it into the bank, if that's a joint account with your spouse, it has now been commingled with everything that is community. So that's where I was discussing earlier, something can be transformed from separate property to community property if it's hopelessly commingled. If we can track, you received this $10,000, here, you put it into your community bank account, but then you immediately went and opened a separate account and put that in there, well, now it's preserved, it's still going to be separate property, you can trace where that went. But when the money goes into the account, and you spend off of it over a term of years, who knows which of those dollars in that bank account belongs to the inheritance or not? It's hopelessly commingled together.

Steve Altishin  11:26  
I was just going to say, that makes sense. And the flip side of that is, what if they have a community bank account, but one person had a car and one person had a house and they both put their wages in it and pay out of that?

Michael Reid  11:42  
Yep, and then we start to have the same kind of thing. So it'll probably affect more with a house than it will with a car. But with a house, say one person owns the house before the marriage, they get married, both people live in the house, and then during the 20 years or so that they're married, both of their incomes are contributing to pay the mortgage on that house. Well now there's a value to that house that probably is some separate property, but there's another value to the house, that is probably community property. And a judge is going to have to go in there and figure out well, how much of it belongs to you, how much of it belongs to you, and then we'll separate it out. And of course, separation of the distribution of assets at the end of a marriage is always tricky, especially with a house. We've got one large asset, how are you going to share that equity? You're probably going to refinance or sell anyway so it all gets separated.

That kind of leads right to my next question which is, does community property mean I own 50% and you and 50%? So, you know, if we decided it's community, I get half and you get half. Does it have to go that way?

No, it doesn't have to go that way. We always kind of have to look at it from the perspective of a judge making a decision. The parties can determine what they want to do themselves before a judge makes a decision. They can figure that out-- if they want to do one thing they can do whatever they do. But once a judge has to make a decision, then the judge is going to step in and say, Well, what is fair? What is equitable? And that's where we look at who contributed to maintenance on the house, who contributed to the mortgage payments, how much? How much are we going to be affected at the end of the marriage by splitting up the equity in this house? Is this a family home that's been in the family for generations? Is it going to have to be sold? And that might actually impact the decision on the judge, because then the judge has to make a decision that is fair and equitable. And when he does that, or she-- it's probably going to be a she--when she does that, she's going to look at the separate property as the whole property of the family. Even though this other house, the cabin in the woods that belonged to you before the marriage and is yours no matter what-- if we have to separate other assets, and there is some kind of an inequity in splitting up those assets, the judge may say, Well, I'm gonna go back and reach into that separate property, bring it back in and say we may use this to distribute. And of course, that more likely going to come up in the terms of, say, an inheritance or a pension or some other financial asset.

Steve Altishin  14:46  
Will the judge ever put support into the equation?

Michael Reid  14:53  
Yeah, yeah, yeah. Meaning a spousal support or alimony? Yeah. It's more likely going to go the reverse in that the judge is going to look at the assets that are available, because that is one of the factors that a judge has to consider in determining spousal support is, what assets are available? What was the lifestyle of the parties? What is the need of the party who's intended to receive it, versus what is the ability to pay? And if the ability to pay also requires including something that may be separate property, that may be considered as part of that equation in determining what spousal support ultimately is.

Steve Altishin  15:37  
Got it. If the spouses either had a prenup, or agree, you know, to divide XYZ, is that binding on a judge? It seems like, you know, without some pretty darn good representation by an attorney, a person cannot be sure what is and isn't community property, and there can be some pretty-- I don't want to say uneven-- but people are trying to do it.

Michael Reid  16:16  
Sure. It could be, and I think that's probably going to come down to how well written is that agreement? Did it consider all the factors that it needed to? Is there maybe a termination on the agreement? Does it ultimately lead to fair and equitable results? Because say, for example, there was a prenuptial agreement, and then after a 38 year marriage, now we've got one party who's left with nothing with no experience and no education and no job and no money. Well, then that is going to be considered as a factor in determining what is spousal support, and what is distributed as assets.

Steve Altishin  17:02  
You mentioned the house, the cabin in the woods, which by the way, was a really scary movie. What if that cabin in the woods is in the woods in Oregon? Is that property considered community property?

Michael Reid  17:20  
The question is, what is the state that has jurisdiction over the divorce?

Steve Altishin  17:28  
Let's say Washington does.

Michael Reid  17:29  
Yeah, that's how I'm answering the question. If Washington has jurisdiction over the divorce, then that's separate property. And again, if it was separate property, it's separate property, right? So if it came into the marriage, it was owned prior to the marriage, it's separate property, regardless of where it was. If it came into the marriage during the marriage, and the divorce is being done in Washington, then I think, and I've never faced this issue in court, but I think that you're going to find that it's community property, because you've chosen Washington as the state that has jurisdiction over your divorce.

Steve Altishin  18:11  
That makes complete sense. To me, that makes complete sense. A little bit on--oh, before we kind of end-- are there certain properties that aren't community property, or maybe are community property, that people should think about because they think that's mine? Like I'm kind of thinking in terms of a pension, or deferred wages? Or, you know, royalties that come later? You can't have that, that's mine, community property doesn't count that.

Michael Reid  18:50  
Yeah, yeah. Some people go into a divorce with that mindset, and they may be finding that it's not necessarily the way that they expected it. Yeah, when we divide, say, a pension, we're going to divide a pension based on what is the marital portion of that pension? So that the ex spouse has a right to, say, 50% of the part of the pension that was earned during the marriage. So we can separate that pension, even a pension or a 401k, we can separate those out and say, Well, you earned this much prior to the marriage, you're going to keep that part. Then everything you earned during the marriage, that's what we're going to split, including interest and earnings on everything. And then when you separate, and that's that's an interesting little question, too, is, at what point do we break that? And in Oregon, the courts have said we break it at separation. In Washington, the parties are going to decide at what point we make that split. And then everything that's contributed to the account afterwards belongs to the party who owns the account. 

Steve Altishin  20:06  
So does the community property-- let's say the judge makes an order, you get this, you get this, you pay this, you pay this-- couple questions on that: let's say the house was in one person's name, but was declared community property, because, you know, it was maybe bought during the marriage, but just one of the spouses bought it. How do they fix that? Is there anything special that maybe a non-community property state would have to kind of fix that? Or is it just the same? I don't know. I'm just wondering how they get rid of the property, especially with selling?

Michael Reid  20:47  
Yeah, it can be challenging, it can be challenging. And in fact, we see cases all the time where people are not acting quickly enough for one party's taste, or they're not doing things that they had agreed to. And during COVID, especially, it was very tough for people to get financing under certain circumstances, and so it comes up. What do you do with this house that has half a million dollars in equity, and that's the only thing that the party has owned, but it's where somebody lives? We need to change the title from one person to another. And we need to figure out the mortgage and get the mortgage so that it's in one person's name. And usually the only way to do that-- there are a couple of ways, like you said, Steve--we can we can sell the house, that'll solve the problem. Or if it's possible, you may get the person who's going to continue living in the house to refinance. And then if they refinance, then that fixes the mortgage issue. And then all is left is that title issue. And the title issue is actually pretty simple. It's really just some simple paperwork that we get signed, notarized and filed with the county. It's pretty simple. As to how we do it in a non-community property state, I'm not sure.

Steve Altishin  22:06  
That makes sense. So let's say that your spouse is ordered to pay community property debts of X, Y, or Z, and then they don't. Does community property status get split so you don't have to worry about it? Or, how does that work in a community property state?

Michael Reid  22:28  
Well, that kind of segues us back into bankruptcy a little bit too. So you've got a debt that belongs to both parties, it's community debt, but in the divorce decree, it's been assigned to one party and not the other. There's also going to be a phrase, a paragraph in your divorce decree that is a hold harmless claim. And what that says is that we recognize that this debt now belongs to one person and not the other. The creditor may or may not see it that way. And so when they're unable to collect from this person, they may go to the other person to try and collect and they may garnish wages or seize bank accounts in order to do that. And they have a right to do that. But now this person has paid some of this debt. And now, instead of this person owing that money to the creditor, they're going to owe it directly to the other spouse. And now we come back into bankruptcy, because what happens to that now, let's say that this person who the debt is supposed to belong to files for bankruptcy. Well they get a discharge, and they get a discharge on that debt as to that creditor, and so they don't owe that creditor anything. The creditor can still come back to the ex spouse and collect that. Now, that debt that is owed from one party to the ex spouse continues to be owed to the ex spouse. That is something that is specifically not dischargeable in bankruptcy, if it's pursuant to a divorce. And that's especially why we have that hold harmless clause in those divorce decrees, to make sure that the spouse that's not supposed to be responsible to that debt is not responsible.

Steve Altishin  24:12  
Yeah, of course. So then the spouse could actually go and sue the other ex spouse to get a judgment for the money? Can they go back to the court and say, Hey, Judge, this person isn't paying me, do something about it?

Michael Reid  24:28  
That's exactly what they can do. And then they have the rights of a creditor, and they can go in and garnish wages or seize bank accounts, if that's what it takes. Yeah.

Steve Altishin  24:38  
So going back to bankruptcy again, and there filing questions issues-- because it seems to me that there might be--that affect, you know, community property rules that affect filing for bankruptcies?

Michael Reid  24:55  
There are, yeah, and I want to talk about the community debts and the community property as well. When you file a bankruptcy, and of course, if the spouses are filing the bankruptcy together, it doesn't matter;  whatever belongs to both you belongs to both of you, and it's all going to be declared in your bankruptcy filing. But when one spouse files and the other doesn't-- and in fact, it even extends to when one one spouse files and the ex-spouse doesn't, because once you're divorced, you can't file together-- there's still that link with community debt. And there could be a link with community property, and that needs to be cleared up. But the basic scenario: one spouse files, the other spouse doesn't. And that's most likely to come up when the marriage is new. And the one spouse enters the marriage with with significant separate debt, because otherwise, it doesn't make sense for you not to file together, because if then the other person has to file, you're going to have to pay all the fees and everything again, and that doesn't make sense. So you should probably be filing together. But if you are filing separately, and you're allowed to do that, you still have to consider all of the assets that are community property as your assets. So even though your spouse has a car and your spouse has a ranch in the Philippines, you still have to count all of that as your property. And it could affect your ability to file between chapter 7 or chapter 13, the ability for you to exempt and keep some of those assets, and it's possible your spouse can lose some assets. And I've actually seen where one spouse filed, then they got a divorce. And the ex spouse lost a car because it was considered community property and asset of the bankruptcy estates. So you've got to be really careful about what you own.

Steve Altishin  26:58  
Yeah, that sort of goes back, I guess, to the to the while you were married, and they look at that kind of thing. Well, you bought the car before you were married, so we're not going to go after that.

Michael Reid  27:09  
It does. The way that community property is addressed in a family law case, it will come back and that's how it will be addressed in a bankruptcy case.

Steve Altishin  27:23  
So if someone comes into you, and I guess this is probably a 'it depends' answer, but someonr comes into you and they are married, but they're clearly going to get a divorce. And they say, Well, when should we file? We file now, should we file during the divorce, or do we file after the divorce? What do you say?

Michael Reid  27:46  
Well, what's gonna happen-- that's what I'm going to start with is, what's going to happen to both parties? Do you both need the protection of the bankruptcy? After the divorce, if one person's probably not going to file bankruptcy, well then maybe you want to file the divorce first and then come back to the bankruptcy. I think more likely than not, you're going to want to do the bankruptcy, get the bankruptcy done, and then file the divorce when you file a chapter seven, which most cases in Washington end up being chapter seven cases. When you file a Chapter Seven case, you're gonna get your discharge probably about three months after you file your case, maybe a little more. And that's kind of a magic number, that three months, because when you file a divorce in Washington, you have to wait three months before the divorce can be finalized. And another part of this when they are married together is that a bankruptcy filing that exists at the time of a divorce means that the family law judge is unable to deal with assets and distribute those assets, because they are tied up in the bankruptcy. So that bankruptcy will either need to be concluded before you finalize the divorce, or you're going to have to get permission from the bankruptcy court to distribute those assets. So they all go together. So the advice is more likely going to be let's file the bankruptcy first. So you file it together, you're married, you can still file the bankruptcy because once the divorce happens, you can't file it together, you have to file separately. And if you're both going to file anyway, why pay all of the attorneys fees and the filing fees again, when you can just do it together?

Steve Altishin  29:35  
It makes 100% sense. Unbelievable, but we're running out of time. I do have one more bankruptcy kind of question because I was thinking about this as you were going through. I know that when you're in a bankruptcy, there are some, I think they call them excemptions, where you get to keep some of your property. That whole keep some of your property thing made me think, well, what property? Does community property kind of get entangled in what property exemptions are allowed in a bankruptcy?

Michael Reid  30:08  
Yeah, it does, it does. And that's what I was saying earlier where, when you file your bankruptcy petition, you're going to claim, you're disclosing, here's all of my property. And you have to include all of the community property, everything that belongs to you, and your spouse. And in order to keep any of those things, they have to be covered by an exemption. And if something is not covered by an exemption, even if it belongs to your spouse, and not to you, according to how the two of you agree, it is at risk of being lost in the bankruptcy. So that's why we need to be careful about making sure we 1) know that you're married, and 2) we know what all of the property both you and your spouse have is, and then 3) making sure that we're able to cover everything with the exemptions, because if not, then we may need to do something else like filing a Chapter 13 instead of a seven.

Steve Altishin  31:04  
That makes 100% sense. Well, I mean, we're gonna have to conclude. This is just a great topic. Is there any thing that we haven't talked about you might add? Just some thing that, you know, beware of this kind of thing?

Michael Reid  31:24  
Yeah, I think probably what I see affecting people more than anything else is that question of if you're filing a bankruptcy, you need to be sure that you're including all of your spouse's property as an asset. I'd say the reason why that's probably your biggest risk is because, let's say you file your chapter seven, you say, here's all my assets, and you leave it at that. And then later, the trustee discovers that you were married, because for one reason or another, there are other places where you're going to have to disclose things. So the trustee says, well, you're married, I see you're married. And he's going to ask, did you include all of your spouse's assets as well? And if the answer is well, no, because they're my spouse's assets, now, all of a sudden, the trustee is going to be interested, because it now looks as if there are assets that can be liquidated and paid, paying off your creditors, and you just need to plan for that.

Steve Altishin  32:20  
Can you have so much money or so much wages are that it may actually kick you out of being able to file a bankruptcy? 

Michael Reid  32:31  
Well, this is a whole half hour topic that you're addressing. The short answer is yes. Like I said, most bankruptcies that are consumer bankruptcies filed in Washington tend to be chapter seven bankruptcies. If your income is above a certain threshold, you're not going to be eligible for that, and you're going to have to file a Chapter 13. And chances are, if that's the case, then there's probably not a problem to that. What there is, though, is a risk that you may lose some of those assets to the creditors. And that's why you have to be careful--whether it's a seven or a 13, that risk is there. 

Steve Altishin  33:14  
Well I'm gonna take up on your word about the next half hour, because I would love to just have a bankruptcy issue and all the intricacies of getting a bankruptcy in Washington. But today, we're out of time. And that is really unfortunate. Thank you, Michael. I mean, really appreciate you talking because this was very straightforward, and you made really complex stuff understandable. And if you made it understandable to me, I'm sure you made understandable to everybody else. So again, Michael, thank you.

Michael Reid  33:47  
Stilll check with an attorney! Even if it sounds easy, still check with an attorney.

Steve Altishin  33:55  
Oh yeah! It seems to me like, it is more important, if not anything else, to check with an attorney when you're in a community property state because you may-- in some other states, you know if you own it, and you know if you don't own it-- here you may not, because you don't know the law that well. So, again, thank you so much for being here today. 

Michael Reid  34:15  
Thank you, Steve. 

Steve Altishin  34:16  
Anyone else, I want to thank you as well for being here and anyone with any further questions on today's topic, you can post it here and we can get you  connected with Michael. And until next time, as always, stay safe, stay happy and be well. See you next time.

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