Divorce, Community Property,
& Debt Obligations in Arizona
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.
Community debts incurred during the marriage are the joint responsibility of the spouses even after divorce. Community Guardian Bank v. Hamlin,182 Ariz. 627 (1995). Since divorce does not absolve the spouses of the community obligations, both spouses can be sued on the community debt after the divorce. The allocation of community debts between the parties through a divorce decree does not bind third party creditors. The creditor can sue both spouses, and the spouses, if they choose to do so, can enforce the divorce decree between themselves. Typically, this takes the form of a cross-complaint in the suit regarding the debt. Death of one spouse does not absolve the surviving spouse from community obligations. VanEmmerik v Colosi, 276 Ariz.Adv. Rep. 33.
Premarital debt is an obligation incurred by one spouse prior to the current marriage. The premarital debt also may be the responsibility of a spouse from a previous marriage if the debt was a community obligation. In this situation, the lawsuit would name the former spouse, and the current spouses of an existing marriage. The current spouse must be sued in an action on a premarital debt for the creditor to reach community assets. Flexmaster Aluminum Awning Co. v. Hirschberg, 173 Ariz. 83 (1992). The new spouse can litigate the other spouse’s liability for the debt and the other spouse’s contribution to the community. §25-215. Litigation regarding the contribution issue is important because the premarital debts may be ordered to be satisfied exclusively out of the debtor-spouse’s contributions to the community. Hines v. Hines, 146 Ariz. 565 (1985). Thus, in a case involving premarital debt that has been reduced to judgment, a garnishment would lie only against the debtor-spouse’s earnings. If a debt is reduced to judgment prior to the new marriage, the judgment can be enforced against the debtor spouse without suing the new spouse on the judgment. The new spouse can not be sued, but is entitled to raise the contribution issue. CBM of Arizona, Inc. v Sevier, 184 Ariz. 503 (1996).
Quite simply, debts incurred by either spouse after service of the petition for dissolution or separation are the separate debts of that spouse as long as the petition results in a decree of divorce or separation. The time between service of the petition for dissolution and the time the decree is signed is a gray area for suit. For example, husband and wife have a $2000.00 balance on a charge account at the time husband serves a petition for divorce on wife. Husband then charges an additional $1000 on the card. If the collection suit is filed after the divorce decree is signed, wife would be responsible only for $2000.00, while husband would be responsible for the full amount of the debt. If the collection action is filed after service of the petition but prior to the decree, the court will likely stay the collection action pending the outcome of the marriage dissolution action. Because the amendments apply only if the petition results in a decree, the collection action is in legal limbo after service of the petition and prior to the decree.