What happens when two spouses file two separate bankruptcy cases? I will use Spouse 1 and Spouse 2 both to distinguish the spouses but also to establish the order of filing — first and second. Spouse 1 files first followed by Spouse 2 later.
Do the community assets of Spouse 1 get included in Spouse 2’s bankruptcy case? Not so says the Court in this published decision but Spouse 2 does have a “Reversionary Right” to those assets.
Here’s what happened in this published Chapter 13 Moreno case from Riverside.
Spouse 1 files for Chapter 7 bankruptcy listing the Toyota Camry in his case. Two months later, while Spouse 1’s chapter 7 was still proceeding, Spouse 2 files for Chapter 13. In Spouse 2’s chapter 13 case, she proposed to cramdown the lender’s loan on the Toyota. But the Toyota, despite it being community property, was not property of Spouse 2’s estate and therefore you cannot cramdown or exempt property which is not part of the estate. The Toyota was part of Debtor 1’s Chapter 7 estate. Arguably, unless Spouse 2 had separate property, her Schedules A/B should have been practically empty according to the court other than a “reversionary right” to the community assets.
What is “Reversionary Right”? I interpret this as a contingent right to community property of Spouse 1’s bankruptcy case.
In this case, the court denied confirmation of the Chapter 13 plan until Spouse 1’s Chapter 7 was over because at that time, all property of Spouse 1 would have vested back to him and thereafter flow into Spouse 2’s Chapter 13 case. So Spouse 2 had a reversionary right to community property currently held in Spouse 1’s chapter 7 estate but upon discharge/closure of the chapter 7, those assets that reverted back to Spouse 1 (including the darn Toyota) would flow through to Spouse 2’s estate in her Chapter 13.
The court cites a pretty cool case from Idaho called Bauer. In this Bauer case, hubby files a chapter 7 and eleven minutes later the wife files. That court said the community property assets of both spouses became property of hubby’s case only. Wife’s chapter 7 case essentially held no assets and as such, she could not claim a homestead exemption in the home because the home was not in her estate. In re Bauer, 2005 Bankr. LEXIS 3033 (Bankr. D. Idaho 2005).
What about litigation rights? Husband and wife want to sue insurance company. Husband files chapter 7 by himself. Wife commences litigation by herself. Caselaw says she lacks standing to pursue litigation based on a community claim because her husband did file bankrputcy and that litigation claim is part of his estate. Thus, motion to dismiss would be granted against the wife’s lawsuit for lack of standing. That’s Griffin v. Allstate Insurance Company, 920 F. Supp. 127 (C.D. Cal. 1996). Similar case is Bostanian v. Liberty Savings Bank, 52 Cal. App. 4th 1075, 1084 (Cal. Ct. App. 1997).
Plot Twist — what if Spouse 1 files Chapter 13 with a bunch of delicious assets followed by Spouse 2 filing Chapter 7? At that point, based on the above case law, the Chapter 7 trustee would have no assets to administer because all assets are part of Spouse 1’s pending Chapter 13 case. So easy discharge of all of Spouse 2 and community debts in the later chapter 7? Hmmm……
Thanks for reading.
Sevan Gorginian, Esq.