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Matthew Foley

Matthew Foley

Esq. & MBA

 

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Split Discharge – Just One Spouse Filing Bankruptcy in Arizona

Community Discharge

The bankruptcy code accommodates Arizona’s community property structure with a discharge that protects both the filing debtor and the marital community.  (See § 524(a)(3)).  That said, only the non-filing debtor remains obligated to separate debts in the event of the dissolution of the marriage.  It is important to note, that if the marital community dissolves, the community debts would evolve into the non-filing spouse’s debt, as permissible under Arizona law.  In actuality however, one could suspect that most debts are written off as “discharged” during the initial bankruptcy and in practice, most debts and debt collectors do not have the sophistication or tracking capacity to follow a non-filing debtor long enough for the potential of a divorce down the road.

Treatment of Debt After Divorce (Non-Community Discharge)

Debt will either be discharged in bankruptcy prior to the final divorce decree being entered, or debts will be assigned via the divorce decree.  If the latter, and despite the court order directing one spouse to pay the debt, a creditor can still collect against either spouse.  Simply put, a creditor is not bound by a divorce decree.   If the creditor collects against the spouse that was not ordered to pay the debt, that spouse can then sue their former spouse for reimbursement.  Furthermore, the debt owed to the former spouse fits within the broad umbrella of “domestic support obligation” and is a non-dischargeable debt.

In summary, careful consideration is warranted when filing bankruptcy in the context of a pending or imminent divorce.  The timing of the bankruptcy, relative to the divorce, will be crucial in determining which debts are dischargeable and which ones are not—particularly in a contested divorce.

Bankruptcy

Arizona’s community property statutes put a twist on bankruptcy filings. A single bankruptcy filing by either spouse brings into the estate all community property. The sole and separate property of the non-debtor spouse is not in any way liable for the debt of the bankrupt spouse. The community discharge protects the property interests of a spouse who has not filed bankruptcy. Even if only one spouse files bankruptcy, the debtor’s discharge operates as an injunction to protect all future community property, including the non-debtor’s share. If there is a community debt and only one spouse files bankruptcy after dissolution of the marriage, the non-filing spouse remains fully liable for all debts incurred during the marriage. Non-filing spouse’s former community property (which, after the divorce, becomes his/her sole and separate property) and all existent separate property is not protected by the bankruptcy discharge. This information is not intended as legal advice and should not be used to replace the advice of your own legal counsel.

 

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