Friday, May 1, 2015

Making a Difference with Property & Debt Classifications

by Christopher S. Mulvaney

     Above is a chart to assist clients in visualizing the different ways property and debt may be held and what the differences result based upon these distinctions.  Property in Washington state may be held by the marital community or by each spouse separately, or a combination of the two.  Single people may hold property as joint tenants with right of survivorship or otherwise jointly own assets, but there is no presumption of community property that applies no matter how property is titled as there is with community property.

In a Trust or Not in a Trust

    Property may be held in a Community Property Revocable Living Trust or a Separate Property Revocable Living Trust.  Doing so makes the property a non-probate asset, meaning that a Personal Representative does not need to be appointed by the Court to transfer the property; the Successor Trustee may do so.  Holding property in a Separate Trust as a married person with a prenuptial or postnuptial agreement clearly identifies the property as separate and sets out the limits of contributions to separate property while married.  The purpose of doing so is to rebut the presumption of community property clearly and in writing to protect against the other spouse's claims as well as the separate creditors of the other spouse.

Burdened by a Lien or Not

    Property itself has potential liability for debts either in addition to or instead of the potential personal liability of the individual(s) owning the property.  This liability is referred to as a security interest, the right to repossess or foreclose for default on payments.  Personal bankruptcy discharges personal liability, but does not affect liens except under limited circumstances in Chapter 13 (See Lien Stripping & Cramdown entries in this Blog).  That is why a creditor may take back a car or boat, but may not sue you for the deficiency if you have obtained a bankruptcy discharge.

Dischargeable versus Non-Dischargeable

    Knowing whether a debt may be discharged in bankruptcy is important in determining negotiating leverage and planning which debts to pay first.  Always pay non-dischargeable debt first.  For example, student loans are not dischargeable in bankruptcy.  So, paying credit card debt while not paying student loans when eligible for a Chapter 7 discharge makes no financial sense.


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Bellevue, WA 98006-1553
Phone: 425-649-1190
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