In Arizona, all property acquired by husband or wife during the marriage is presumed “community property” unless a spouse acquired the property via a gift, inheritance, or owned the property prior to entering the marriage (See A.R.S § 25-211).  Community property begins at marriage and terminates at either death or upon service of either the Petition for Divorce or Legal Separation.  In addition, each spouse has equal management, control and disposition rights over their community property and have equal power to bind the community, i.e., incur debt on behalf of the marriage (See A.R.S. § 25-214).   Arizona does carve out exceptions to “binding” the community with respect to acquisition of real property or guaranteeing a loan (See A.R.S. § 25-214(C)).

Likewise to the treatment of assets being community property in Arizona, debts incurred during the duration of a marriage are also deemed community in nature.  Spouses acting in the capacity of marriage are presumed to have incurred debt for the benefit of the community (See A.R.S. § 25-215).  Often this is secondary to the obvious dual contractual obligation if both husband and wife signed and incurred the debt.  If a debt preexists the marriage, a creditor only has access to the community assets only to the extent of that spouse’s contribution to the community estate.

In most cases, it is better to file the bankruptcy prior to finalizing the divorce.  Filing the bankruptcy first will prevent the family court from entering orders that might be non-dischargeable later in a Chapter 7 bankruptcy.  (See § 523(a)(5) & (15)).  In addition, by filing a joint or separate bankruptcy prior to finalizing the divorce, the marital community receives a discharge, allocating debts during the property settlement is avoided, and if filing jointly, the debtors can save money on attorney fees.  Inversely, if a divorce is finalized prior to filing bankruptcy, ex-spouses cannot file jointly, and more importantly, assigned debts may become non-dischargeable in a Chapter 7 Bankruptcy.  Specifically, a Chapter 7 discharge does not eliminate obligations of a divorce decree or separation agreement.  Note, a Chapter 13 can discharge some domestic support obligations under subsection (15).

As an exception to filing a bankruptcy prior to finalizing a divorce, if the martial community has non-exempt property, it may be beneficial to allocate this property strategically among the spouses, to enable one spouse to file a Chapter 7 bankruptcy without jeopardizing this property to the bankruptcy process. An alternative would be to have the family court enter a temporary order allocating assets, could also protect non-exempt assets.  Another concern to filing bankruptcy first, is that an Arizona family court judge can take into consideration a debtor’s discharge of community debts in a contested division of community property.  However, this risk is perhaps secondary to risk of creating non-dischargeability issues.