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Phantom Discharges In Community Property States

November 21, 2011
JudgmentBuy.com
I am not an attorney, I am a judgment and debt referral specialist (Judgment and Collection Agency Broker). This article is my opinion, from my experience in California, and laws are different in each state. If you want a strategy to use or legal advice, you should contact a lawyer. What if one has a judgment debtor, whose non-debtor spouse filed for Chapter 7 Federal bankruptcy court protection? What if just the non-debtor spouse filed for BK, and the debtor-spouse did not?

How can you enforce a judgment against the judgment debtor spouse, if their non-debtor spouse filed for bankruptcy protection, or has already discharged their debts in bankruptcy? How could this interfere with one attempting to recover a judgment from the non-BK community property state-based debtor spouse?

After a non-debtor spouse has initiated a BK, or has previously discharged their debts; attempts to levy the debtor spouse's debt with community property is stayed (forbidden and illegal).

The judgment debtor spouse's sole and separate property is regularly available for to satisfy a judgment. However, one need to be very careful never to violate a BK court's order, and do the homework. With a small judgment, or when the debtor is and will stay broke, it might be a good idea to stop reading here, and forget about the judgment.

BK stay violations can bring severe penalties, so you need to be careful to instruct marshals or sheriffs garnish only non-dischargeable and/or non-stayed assets. To be extra safe, oneshould make double-sure what assets are legally and actually available first. One of the best ways to look before one leaps, is with a debtor examination (often with a request for document production). This is accomplished by scheduling and serving an OEX (Order to appear for EXamination) on the debtor.

When BK is involved, it's a very good idea to first obtain permission from the BK court, prior to trying any enforcement or discovery actions against a debtor.

To help to determine what one's first or next recovery tactic could be, you could begin by requesting of the bankruptcy court for leave (permission from) their bankruptcy court, to allow you to buy a state court issued OEX (Order to appear for EXamination), served on the judgment debtor, with its included (at least in California) OEX lien against only the debtor spouse's separate and sole property.

In many states, serving an OEX on a judgment debtor starts a lien against their personal property. In California, serving an OEX on a judgment debtor spouse starts a one-year "silent" lien against the personal (although not real-estate based) and community property shared by their other spouse, if it is not stayed by a BK protection.

The judgment debtor and their spouse have a 100% undivided interest in the community property of the marital assets, as long as they remain married to one another. In a community property state, when one spouse's debts become discharged with BK, any community property that was acquired pre-petition (and usually pre-discharge), is immune to levy due to a "phantom discharge" created by current laws. (I am not an attorney.)

The word "phantom" in the phrase "phantom discharge" means that in a community property state, there can be an additional BK protection when one spouse files for bankruptcy protection, which may protect the assets of the other debtor spouse. Usually, "phantom discharges" occur only in community property states (currently California, Arizona, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and probably Wisconsin).

A phantom discharge occurs when personal and real estate-based community property becomes immune from judgment enforcement against a judgment debtor spouse, because the non-debtor BK spouse owns a one hundred percent and undivided interest in the community property estate, and that spouse's indebtedness has been discharged.

A phantom discharge is an unearned shield against creditors for all community property assets of both spouses in a married couple, even if only one spouse discharged their debts in bankruptcy. (See BK codes 11 US 541 and 11 US 524).

While the couple remains married, the phantom discharge remains, which is many times a great injustice for judgment creditors of the (non-BK) judgment debtor spouse.

If the married couple qualifying for a phantom discharge becomes divorced, you can petition the family court to enjoin the divorce proceedings, and levy the nonexempt part of the debtor spouse's portion of their marital estate, if any.

Only people or entities may obtain bankruptcy discharges. Property is not an entity, so it cannot get a discharge. Sometimes a debtor does not win in BK court, and one or all, of their debts are declared non-dischargeable.

In most community property states; and in California, family code section 910 (a), mandates that the personal and real property of the community estate may be used to pay the debts of either spouse incurred during or before marriage. This means that real or personal property of the community estate can be used to pay a non-dischargeable debt. This is the opposite of a phantom discharge, so creditors get a clear path to all of the community assets of the debtor.

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Mark Shapiro - the best judgment expert, with the best quality free leads for enforcers, collection agencies and contingency collection attorneys.
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