An article on the Network Bankruptcy Law on exemptions touched obliquely on a point not widely discussed: debtors get to keep assets where the sale value of the asset equals the exempt amount PLUS the costs of administering the asset. A basic principle guiding what a Chapter 7 trustee does is that he only administer assets of the debtor where his sale of the assets results in a meaningful dividend to creditors.

Where I practice, trustees are not interested in opening a case where the gross funds in the estate is several hundred, or even several thousand dollars. By the time the trustee pays his commission, an accountant to prepare a tax return and examine claims, that sum of money won’t pay a meaningful dividend to creditors. In those situations, most trustees will abandon the non exempt value in assets.

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A basic principle of law is that each person is only personally liable for debts they create: marriage does not automatically make the spouses liable for each others debts. An exception is debts for necessities of life.

In California, a marriage can be seen as comprising three entities (wouldn’t you know it in California): husband, wife, and the community property. California law assumes that assets acquired during marriage are community property. The entirety of the community property is liable for the debts of either spouse.

Under this system, then, if husband contracts a debt, husband’s creditor can reach both halves of the community property to satisfy that debt. If the parties don’t have community property, as by reason of a pre nuptial agreement, then the creditor can reach only the husband’s earnings and assets. If the spouses divorce, the community is terminated. Once the community property is divided in the divorce, that former community property becomes the separate property of the recipient spouse.

More about community property in bankruptcy.