Community Property in Bankruptcy: Laws of Unintended Consequences

• Author: Margaret Dee McGarity
• Position: U.S. Bankruptcy Judge, Eastern District of Wisconsin.
• Pages: 143-159

Community Property in Bankruptcy: Laws of

Unintended Consequences

Margaret Dee McGarity∗

For most people, the law is seemingly irrelevant to their

personal lives. They go about their business, doing whatever is

necessary to fulfill the needs and wants of daily life, all without the

intervention of lawyers or courts. If a large purchase requires both

a husband and wife’s signatures, they both sign. If a credit card

application requires both signatures, perhaps because one spouse

has insufficient income to qualify alone, both sign. Even if only

one spouse signs the application, they pool their money to pay the

bill. Signatures are required for other activities, such as opening a

bank account or designating a death beneficiary. No problem; the

documents get signed. No one contemplates the legal

consequences of what they have done; they just do it.

When legal intervention is necessary, the role of the law is

often predictable. If you beat up someone in a bar, the police will

haul you away. If you do not make your car payments, a court will

eventually be involved, and you are riding your bike or the bus. An

individual might need a lawyer for a will, but he or she might use

cheaper self-help forms. The person using those self-help forms

probably feels the result is predictable because nothing has

happened to tell him otherwise. Courts are necessary for divorces,

but many people are forgoing legal advice even here. They will

never know which remedies are lost, but the divorce is completed.

Expectations are met.

When it comes to credit, most people expect to pay their debts

and avoid any legal consequences, but it does not always work that

way. Unemployment, divorce, and medical problems are leading

causes of bankruptcy, and these are not always foreseeable when

one incurs a debt. Similarly difficult to predict are auto accidents

for which an individual is found liable, or business failures with

substantial guaranteed debts or other personal liabilities. In

community property states,1 all or most non-exempt community

property can be recovered to pay the debts of one spouse if those

debts were incurred for a community purpose, and most spouses in

those states probably realize that. Several community property

Copyright 2011, by MARGARET DEE MCGARITY.

∗ U.S. Bankruptcy Judge , Eastern District of Wisconsin.

1. Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico,

Texas, Washington and Wisconsin are all community property states. Alaska is

an opt-in community property state. Puerto Rico allows property to be owned as

community property, as do several Indian jurisdictions.

144 LOUISIANA LAW REVIEW [Vol. 72

states have modified collection rules to protect certain types of

property, especially for pre-marriage debts of one spouse, torts

incurred by one spouse, or for non-community purpose debts.

Nevertheless, the scope of creditors’ collection rights often

surprises spouses. Many a heated dinner conversation has

undoubtedly taken place when one spouse’s wages are garnished

for a debt incurred by the other.

In the 12-month period ending March 31, 2011, 1,571,183

bankruptcy cases were filed in the United States.2 As long as there

has been commercial activity, dealing with insolvency has been

necessary, a purpose which bankruptcy serves. Vigorous

commerce requires investment and credit, so the people with

money can make more money by putting that money into

enterprises run by people without money. Everyone wins when the

enterprise is successful. But the crops might fail, or the ship might

go down, and the leftovers have to be divided. Since there may be

multiple interested parties vying for limited resources, the process

might not be as easy as signing a joint credit application. Rules

become more important as the opportunity for adversary interests

increases. The writers of the Constitution provided that only

Congress could pass laws on bankruptcy, thereby enhancing

commerce by ensuring uniformity to a substantial extent when

insolvency occurred.3 Historically, when there has been a

bankruptcy law, it has applied only to liquidation and only to

businesses. The concept of discharge of debts by an individual

debtor has relatively recent origins, but it has caught on

dramatically.

The vast majority of recently filed cases are consumer cases,

filed by individuals seeking either a discharge of most of their

debts in chapter 7, or a relatively modest reorganization in chapter

13 that will enable the debtor to keep a house, car, or other secured

asset. Of total filings, 1,516,971 were non-business cases.4

Although the federal bankruptcy law, Title 11 of the United States

Code, is intended to be uniform, the obligations incurred by

individuals and the property rights related to debt collection are

generally creatures of state law. The overlay of a federal statute on

such disparate property systems as the common law title system

and community property system can create surprisingly different

2. ADMINISTR ATIVE OFFICE OF THE UNITED STATES COURTS,

BANKRUPTCY STATISTICS, 2010–2011 MARCH YEAR COMPARISON, http://www.

uscourts.gov/uscourts/Statistics/BankruptcyStatistics/BankruptcyFilings/2011/0

311_f.pdf.

3. U.S. CONST. art. I, § 8, cl. 4.

4. ADMINISTR ATIVE OFFICE OF THE UNITED STATES COURTS, supra note 2.