THE advantage of a prenuptial agreement is clear when one of the spouses files for Chapter 7 bankruptcy soon after the marriage. But even in a community property state, money that belongs to each spouse is his or her exclusive property. Therefore, money belonging to the non filing spouse should not be affected by the bankruptcy of the filing spouse. For example, you have $100,000 in your bank account acquired before marriage. After you marry, your spouse, files for Chapter 7 relief to discharge $80,000 of credit card debt. Will your spouse’s bankruptcy affect your $100,000? In California, a community property state, your $100,000 is your separate property. It will not be affected by your spouse’s bankruptcy.
If you had a prenuptial agreement, it would even be clearer that the $100,000 has nothing to do with your spouse. But what happens when you put your spouse’s name on the $100,000 account as a joint account holder, then your spouse files for bankruptcy? That’s a different situation because even if the source of the funds is your savings, the fact that you put your spouse in as a joint account holder might mean that you decided to give your spouse a legal interest in the entire $100,000 as a gift. In this situation, you could lose as much as $80,000 of your money to the bankruptcy trustee even if only your spouse filed for bankruptcy, and even if the source of the money is your own savings before marriage. So, a word to the wise, if you have pre marital assets of any kind, don’t put your spouse’s name as a joint owner on any of these assets, to preserve the status of your own assets as separate property to make these assets immune from your spouse’s bankruptcy.
In Re Kuhl, the debtor and her husband were married on November 11, 2011. Four days later, the debtor’s husband added the debtor’s name to his checking account at Security National Bank; romantic, but unwise. On December 12, 2011, the debtor’s husband added the debtor’s name to his checking account at First Community Bank. On January 30, 2012, the debtor and her husband opened a savings account at Security National Bank. The debtor filed for Chapter 7 relief on March 30, 2012. At that time, the balance in the SNB checking account was $8,154, and the balance in the SNB savings account was $16,006. The trustee asked the bankruptcy court to order the debtor to turn over the value of the funds in three bank accounts. In making this demand, the trustee relied on a presumption arising under Illinois law that each owner of a joint bank account owns all of the funds in that account. Debtor argued that her husband was the sole owner of all the money in the accounts notwithstanding the joint ownership of the accounts. The court said that the two primary factors for determining ownership of joint bank accounts are control of the account and the source of the contributions to the accounts. There was no dispute that the accounts were funded exclusively with money belonging to the debtor’s husband, and that his contribution of the money was not intended as a gift to the debtor. In addition, there was no evidence that the debtor exercised any control over the First Community checking account and the SNB savings account. While the SNB savings account was created to pay for both spouse’s health insurance, the court said that fact alone did not support a finding that the funds in the savings account belonged to the debtor. Based on these facts, the court denied the trustee’s request for turnover of the funds from the First Community checking account and the SNB savings account but ordered that debtor turn over to the trustee half of the money in the SNB checking account.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.