Rights of Creditors to Collect Marital Debts after Divorce in Community Property Jurisdictions

Abstract

Creditors who extend credit or otherwise become entitled to payment of obligations owed by debtors have various legal rights and expectations, mostly to collect those obligations in due course based on agreement or operation of law. Debtors are personally and legally obligated to pay obligations they incur. When debtors default with respect to payment of those obligations, creditors generally have the right to bring a legal cause of action against those debtors and acquire a judgment. Failure by the debtor to pay the judgment gives the judgment creditor the right to exercise various post-judgment remedies to collect the judgment, including attachment and foreclosure of nonexempt property owned by the debtor. When a debtor is married, issues arise with regard to whether the judgment creditor can attach property owned in whole or in part by the debtor’s spouse. There exist two separate types of marital property regimes in the United States. The most common of these is the common law property system adopted from the laws of England. In general, when only one spouse is personally liable for an obligation, a judgment creditor cannot attach property owned by the other spouse to satisfy the judgment. Spouses in common law property jurisdictions are treated as separate persons with regard to obligations incurred by only one of them during the marriage. The second type of marital property regime used by nine of the states is the community property system, adopted from Spanish law. In this system, marital property is characterized as either separate property of one spouse or community property. Separate property is treated generally as if the spouses are single and not married. As a consequence, with respect to obligations for which only one spouse is personally liable, separate property in the community property system is treated generally the same as marital property in the common law property system. A judgment creditor cannot attach separate property owned by the other spouse to satisfy the judgment. Community property is treated as if each spouse owns an undivided one-half interest in such property. A significant issue in the community property system is to what extent a judgment creditor with respect to an obligation for which only one spouse is personally liable can attach community property to satisfy the judgment. The nine community property states have adopted a variety of distinct rules with regard to this issue. Some jurisdictions have adopted rules that are extremely friendly to creditors, allowing the attachment of virtually any nonexempt community property to satisfy a judgment for which only one spouse is personally liable, regardless of whether the underlying debt was incurred before or during the marriage. Other jurisdictions have adopted rules that are more restrictive with regard to creditors, preventing the attachment of certain community property based on a variety of factors. Part II of this Article will provide a review of the rules that are used in both the common law property states and the community property states with regard to this issue. A much more troublesome issue has arisen in the community property states when spouses divorce; namely, to what extent a creditor is allowed to obtain a judgment after divorce against a spouse who is not personally liable for a debt incurred by the other spouse either before or during the marriage, and attach nonexempt property either received by such spouse in the divorce or subsequently acquired by such spouse. This issue has been dealt with in a variety of ways by the nine community property states. As with the first issue discussed above involving attachment during the marriage of property owned by the non-debtor spouse, some of the states have adopted rules that are extremely friendly to creditors and others have adopted rules that are more restrictive. In some jurisdictions, creditors acquire greater rights as a result of the divorce than they would have if no divorce had occurred. Part III of this Article will provide a review of the rules that are used in the community property states with regard to this issue. The primary thrust of this Article is to address the post-divorce liability issue discussed in Part III from the perspective of debtor-creditor law. The rules adopted in most of the community property jurisdictions with respect to this issue appear to be focused primarily on the perspective of marital property and family law without regard to general debtor-creditor law principles and policies. For example, basic fraudulent transfer law has been ignored in those jurisdictions and not applied in the usual manner. As a result, the rules developed in those jurisdictions with regard to the post-divorce liability issue are not consistent with the basic principles and policies of debtor-creditor law. Part IV of this Article will discuss basic debtor-creditor law as it relates to this issue, and will propose a set of rules that could and should be adopted by the community property jurisdictions that will be consistent with debtor-creditor law as it applies generally.