Exploration of Special Problems Associated With California Spousal Exemption Waivers Under Cal. Code Civ. Proc. §703.140(a)(2)

by Raymond M. Schimmel on September 3, 2011

California allows a debtor to pick between two different sets of bankruptcy exemptions, and the chosen set of exemptions must be used exclusively.  One set of exemptions protects debtors against judgment creditors.  This is referred to as the “regular exemptions” and is found in Cal. Code Civ. Proc. §§ 703.010 to 704.995, excluding §703.140(b).  The other set of exemptions resembles the federal bankruptcy exemptions and is found at Cal. Code Civ. Proc. §703.140(b).  These are commonly referred to as the “special bankruptcy exemptions.”

The most significant of the differences between the two sets of exemptions is that “regular exemptions” allow a large homestead exemption to be applied towards protecting the equity in the debtor’s residence.  The homestead exemption varies in value between $75,000 and $175,000 depending on the debtor’s age, marital status, disability, income, and dependents.   On the other hand, the “special exemptions” limit the homestead to $23,250, but unlike the regular exemptions any portion of the unused homestead may be applied to any other property that the debtor owns; this feature is often called the “wildcard exemption.”   On many occasions where a debtor does not have significant equity in their personal residence the “special exemptions” will better protect the debtor’s property.

Married debtors who are filing bankruptcy without their spouse and want to use the “special exemptions” must sign along with their non-filing spouse  a “Spousal Waiver” pursuant to §703.140(a)(2).   The Spousal Waiver specifies that the non-filing spouse waives their right to use the “regular exemptions” as well as non-California state or federal exemptions that might otherwise be available where the non-filing spouse resides or has resided outside of California during the time the filing spouse’s bankruptcy is pending.  In other words, if the non-filing spouse later files a bankruptcy and their spouse’s case is still open they are limited to using the “special exemptions.”  So for example, where both spouses have signed a spousal waiver if the first filing spouse has claimed the maximum exemption for designated assets in the amount of $23,250  under §703.140(b)(5) the other spouse if they should subsequently file may not designate any additional assets exempt under §703.140(b)(5).  The subsequent filing spouse is limited to using any left-over §703.140(b) balances that were not already claimed by their spouse in their currently pending case.  A good discussion and example of the hardship that may arise for a subsequently filing spouse can be found in the Eastern District of California case,  In re Celestino Aguilar, Case No.  03-60549-A-7, (Bankr. E.D. CA., 2005).

While the average Chapter 7 case might only stay open for a few months, some Chapter 7 cases may be kept open much longer if there is a benefit to that may be gained by the trustee on behalf of the bankruptcy estate.  In addition cases filed under Chapter 13 and under Chapter 11 or subsequently so converted may stay open for several years significantly increasing the potential for hardship to the non-filing spouse.

In a majority of cases the debtor who is thinking about filing for bankruptcy without their spouse can get the non-filing spouse to sign the “spousal waiver,” without posing any hardship on the non-filing spouse.   This is particularly so in view of the fact that most routine Chapter 7 with few assets will only remain open for a few months.  Once their spouse’s case is closed the non-filing spouse no longer faces any restrictions on their use of exemptions if they subsequently need to file for bankruptcy.  In addition signing the “spousal waiver” may help the non-filing spouse by allowing the filing spouse to get a fresh start and keep necessary assets that will be needed for their support and the support of dependent children.

On occasion however serious problems arise.  Perhaps the non-filing spouse cannot be found or the spouses are not on speaking terms.  On other occasions, it may not be in the non-filing spouse’s best interest to sign the “spousal waiver.”  This is one reason why it is not advisable to give advice regarding the waiver to the non-filing spouse when you are representing the filing spouse.

First, you find pro se cases, or cases where the debtor has been improperly advised by counsel, where no “spousal waiver” has been signed and the “special exemptions” have been claimed.  The bankruptcy trustee will invariably object to the “special exemptions” being improperly claimed.  In the court where I practice (Southern District of California) the trustee will insist on being given a copy of the signed “spousal waiver” in every applicable case.  Where there is an unavailable or un-cooperative non-filing spouse the bankruptcy schedules will need to be amended.  The “special exemptions” will need to be replaced with the “regular exemptions.”  This might mean that some of the debtor’s property may no longer be adequately covered by claimed exemptions.  The resulting non-exempt property may accordingly be sold by the bankruptcy trustee on behalf of the bankruptcy estate.  This will often result in an unhappy debtor losing their paid for automobiles or otherwise exempt savings.  This is why competent counsel will insist on having the “spousal waiver” in the file prior to the bankruptcy case being filed unless the client has made an informed decision to choose the “regular exemptions” rather than the “special exemptions.”  As a practical matter where a “spousal waiver” cannot be obtained, some debtors may rather forego filing bankruptcy altogether.

Sometimes there is also an issue where the signing of the “spousal waiver “ is not in the best interest of the non-filing spouse.  Let me give you an example from a case I had a few years back.  The husband and wife were in the midst of a messy divorce.  The wife was filing bankruptcy and needed a spousal waiver to protect the net equity (after deducting hypothetical selling and administrative costs) of about $20,000 in a condominium rental that she had inherited as her separate property.  The husband on the other hand had no plans for filing bankruptcy, but he was jointly liable on most of the credit card debt.  When he presented his attorney with the “spousal waiver,” his attorney advised that if wife’s rental property were liquidated by the bankruptcy trustee the proceeds would go towards paying off the joint debt and reduce his liability.  I was unable to convince the husband’s counsel that the payment amount toward the joint debt would be small after the administrative expenses of the estate were paid.  Ultimately we waited until the divorce was finalized and then filed the case claiming the “special exemptions.”

A colleague of mine has given me an even more significant example of why it might not be in the non-filing spouse’s best interest to sign a spousal waiver.  Take the situation where the separated wife resides in Florida and may claim Florida’s unlimited homestead exemption on a residence that she inherited as her separate property.  If she agrees to sign a spousal waiver and her husband files for Chapter 13 she may be precluded from using her Florida homestead if she subsequently needs to file for bankruptcy.  Having to wait five years may not be acceptable.  In the alternative the wife may not be willing or able to get a divorced finalized in a timely fashion to prevent some adverse consequence from not filing bankruptcy right away.

In conclusion, the spousal waiver issue should be worked out in advance of a bankruptcy filing.  Where a waiver cannot be obtained in an applicable case that is already pending the § 703.140(b) can be invalidated upon a timely objection by the trustee with undesirable consequences.  Accordingly, where a “spousal waiver” is needed a fully executed form should be in the file before the client’s case is ever filed.  Where a “spousal waiver” cannot be obtained the debtor will need to understand the consequences of having to use the “regular exemptions” in advance of the case being filed. In addition, for those representing a non-filing spouse the pros and cons of signing the “spousal waiver” should be carefully considered.  The analysis will ultimately depend on the likely length of the filing spouse’s case, the potential exemption needs of the non-filing spouse, and the joint benefit that the non-filing spouse may receive in reducing the burdens for their spouse and dependents.

For bankruptcy assistance contact Ray Schimmel, Esq. at (619) 275-1250

http://www.endbillcollections.com

 

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