Termination of marital property community and its impact on bankruptcy proceedings

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Is a wife liable for her husband's debts or a husband for the debts incurred by his wife? The answer is not clear and easy to give. The financial situation of spouses is undoubtedly influenced by the existence of community of property or its absence. In this article, we will discuss how the end of community of property affects bankruptcy proceedings and what rules govern this issue.

Article 31 § 1 of the Family and Guardianship Code, i.e. the Act of 25 February 1964, states that at the moment of marriage, a community of property, also known as statutory community of property, is established between spouses by operation of law. It includes all property items acquired during its duration by both spouses or only by one of them. Marital community of property is therefore a form of managing property acquired during the marriage. The termination of marital community of property may have significant consequences in both civil law and bankruptcy law. 

As a rule (according to Article 124 of the Bankruptcy Law, hereinafter referred to as "BPL"), at the moment declaring bankruptcy a separation of property regime is established between spouses, and the joint property becomes part of the bankruptcy estate. This is to optimize the degree of satisfaction of creditors. Nevertheless, spouse of a bankrupt may pursue in bankruptcy proceedings claims for a share in the joint property that has just become part of the bankruptcy estate.

In order to prevent cases of "siphoning off" joint property from the bankruptcy estate, the legislator has introduced certain rules aimed at ensuring the protection of creditors. This is reflected in the introduction of certain time limits that must elapse from the moment of transformation of the property regime to the time of declaration of bankruptcy in order for this action to be considered effective.

It is therefore worth being aware of the situations in which the joint property of spouses may cease – this can happen in several ways, including:

• court ruling,
• divorce,
• separation,
• marriage contract (spouses may introduce changes to the property regime through an agreement aimed at excluding, limiting or extending the community of property).

Each of these cases involves the need to settle assets, which becomes particularly complicated in the context of bankruptcy proceedings.

Termination of community of property based on a court decision

The first provision determining the effectiveness of the establishment of the separation of property is Article 125 section 1 of the Property Law, according to which: "The establishment of the separation of property based on a court decision within one year prior to the date of filing a bankruptcy petition is ineffective in relation to the bankruptcy estate, unless the lawsuit for the establishment of the separation of property was filed at least two years prior to the date of filing a bankruptcy petition.”. In such a situation, it is considered that the property that was joint, despite the fact that a judgment of separation was issued, would be included in the bankruptcy estate. And the debtor's creditors could obtain satisfaction from the property, as if the separation had not been established. 

As a rule, the separation of property occurs on the day specified in the judgment that establishes it (this is a mandatory element of the judgment), and most often it is the day between the date of filing the lawsuit and the date of issuing the judgment. However, in exceptional cases, the court may establish the separation of property on a day earlier than the date of filing the lawsuit. Our colleague encountered such a situation in one of the bankruptcy proceedings he conducted. The bankruptcy petition was filed by the debtor on 21.02.2019. However, as a result of the lawsuit to establish the separation of property filed on 11.08.2017, the Court ruled on 13.03.2018 that the separation of property between the spouses occurred on 01.05.2017. In this case, the trustee faced a problem of interpretation of the content of the provision cited above, because the legislator did not directly decide how to treat the situation of establishing the separation of property with an earlier date, in the case when it was ruled before the decision on the declaration of bankruptcy was issued. In the doctrine, three views have been formed according to which, on the basis of art. 125 sec. 1 of the bankruptcy law, the one-year period before filing the application should be counted from:

1. the day of the court’s decision to establish the separation of property (Z. Świeboda, Commentary on Bankruptcy Law…, p. 179; A. Jakubecki [in:] A. Jakubecki, F. Zedler, Bankruptcy Law…, 2010, p. 279)
2. the date of establishment of the separation of property (D. Zienkiewicz [in:] J. Minus, A. Świderek, D. Zienkiewicz, Bankruptcy Law…, p. 300 and D. Chrapoński [in:] Bankruptcy Law…, p. 196 – this concerns the date of establishment of the separation of property)
3. the date on which this judgment became final (M. Uliasz, New bankruptcy law…, p. 489).

Trustee was of the opinion that the purposive interpretation of the provision in question supports the adoption of position no. 1; however, in order to prevent any potential objections, the trustee filed a motion to the judge-commissioner to resolve the doubts in the proceedings in question as to whether the real estate jointly owned by the spouses should be included in the debtor's bankruptcy estate in its entirety or only in a ½ share. In the described proceedings, the judge-commissioner shared the trustee's arguments and indicated that the bankruptcy estate included the entire real estate. 

It should be clearly stated that the separation of property cannot be established after the declaration of bankruptcy, nor can it be established on a date earlier than the date of declaration of bankruptcy, as provided for in Article 125 paragraph 2 of the Bankruptcy Law, even if the action was filed before the declaration of bankruptcy, because by operation of law the separation of property between spouses arises on the date of declaration of bankruptcy, and conducting separate proceedings in this case should then be considered inadmissible and pointless.

Termination of community of property as a result of divorce

The next provision refers to the effectiveness of the separation of property resulting from divorce, separation or incapacitation of one of the spouses. The legislator adopted the same time range for the effectiveness of such actions as above. However, in this case, there are no problems with the interpretation of the provision, because in the case of a ruling on incapacitation and separation, the separation of property regime comes into force at the moment the decision, judgment on incapacitation or separation becomes final (Article 52¹ § 1 and 363 § 1 kpc), and the Family and Guardianship Code (art. 53 and 54) does not provide for the possibility of an earlier establishment of a compulsory regime. Hence, it is not permissible to rule on the establishment of a separation with a retroactive date when ruling on separation or incapacitation. In the case of divorce, there can be no talk of a transformation of the regime, because as a result of divorce, the marriage ceases, and therefore on the day the judgment ruling a divorce becomes final, the community property regime also ceases. Also in this case, it is not possible to rule in a divorce judgment on the termination of community property with a retroactive date. It is worth mentioning, however, that in the above-mentioned cases, the divorced spouse of the bankrupt or the spouse of the bankrupt may, by way of a claim or objection, request that the separation of property be recognized as effective in relation to the bankruptcy estate, if at the time the separation of property arose he or she was not aware of the existence of a basis for declaring bankruptcy, and the establishment of the separation of property did not lead to the detriment of the creditors (Article 125, paragraph 3 of the Bankruptcy Law).

Termination of community of property on the basis of an agreement

However, most of the cases conducted by our office bankruptcy proceedings most often, property issues of spouses are shaped by marriage contracts. Often, the property interests of the spouse are secured before starting a sole proprietorship or in the face of emerging problems with payments for liabilities, including relatively often on the eve of declaring bankruptcy. Art. 126 of the Bankruptcy and Mortgage Law states that the establishment of the separation of property or its limitation by a property contract is effective in relation to the bankruptcy estate only if the contract was concluded at least two years before the date of filing the bankruptcy petition. If the specified time period has not been observed, then such an agreement has no effect on the bankruptcy estate.  

It is worth noting that agreements extending the community of property, even those concluded within two years prior to filing a bankruptcy petition, result in the bankruptcy estate including the community property in the state in which it is on the date of the court's decision on the declaration of consumer bankruptcy. The regulation adopted in Article 126 of the Bankruptcy Law does not refer to agreements aimed at extending the community of property and the reason for shaping this issue in this way is undoubtedly the legislator's desire to meet the purpose of the proceedings, which is also to satisfy creditors' claims to the greatest extent possible, hence it is reasonable to modulate the regulations in such a way that the property included in the bankruptcy estate is as large as possible.  

End

The above considerations concern only the essence of the separation of property and its termination, but do not cover the further part of this problem, which is inextricably linked to it, namely the issue of the division of property between spouses. The admissibility of the division of property or any property settlements during bankruptcy proceedings, or the effectiveness of such actions taken before the declaration of bankruptcy, is a broad issue and requires a separate discussion.

In conclusion, it should be emphasized that the role of the trustee in bankruptcy proceedings is to examine the financial situation of the debtor (and even his spouse), including determining what assets are part of the bankruptcy estate, as well as whether the legal actions taken by the debtor before the declaration of bankruptcy are effective with respect to the bankruptcy estate according to the applicable provisions of law. It is the extent of the assets that will be classified as part of the bankruptcy estate that determines the extent to which it will be possible to cover the debtor's liabilities. Additionally, although a rather non-obvious effect of a higher degree of satisfaction of creditors during bankruptcy proceedings is that the debtor can then count on a shortened period of the creditor repayment plan. In addition, the possibility of obtaining debt relief and the length of the repayment plan is also influenced by the manner in which insolvency arose. For this reason, it is worth ensuring that all legal actions taken were transparent by the debtor and served to repay obligations. Let us not forget that, as a rule, the debtor should fulfill the obligation in accordance with its content and in a manner corresponding to its socio-economic purpose and the principles of social coexistence. It is also thanks to the principle and its observance that not only the national economy but also the global economy can function, and citizens can benefit from a multitude of services and products.

Nevertheless, we should not lose sight of the fact that life is very dynamic, and the obligations we assume in good faith may often be impossible to repay for reasons beyond our control, therefore, both economic and consumer bankruptcy appear to be a natural element of our life cycle, both professional and personal, and it is only up to us whether we use it thoughtfully and get a second chance for our personal and professional life, or whether debts will be a drag on our feet for the rest of our lives.