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What to do if a member defaults or moves to a community property state
reprinted from "Credit Union" a publication of the Credit Union National Association, Inc
September 1999
One of the more confusing and difficult challenges facing credit unions is determining the appropriate course of action when a member moves from a noncommunity property state to a community property state when a loan is in default. The variety and subtleties of state law probably explains why so little is written on the subject. Hence the disclaimer right up front: always consult an attorney in the state your member moved to.
And while I make disclaimers that this article is not intended as a substitute for legal advice. No article or book can ever be a substitute for competent advice and such advice should always be sought out when practical.
With the "fine print" behind us, let us briefly explore the often mysterious and elusive topic of community propery.
Born of Spanish origin, community property law in the Americas evolved from the time of European colonization. Broadly, community property is a system defining marital property rights recognizing common ownership of married peoples' property. in community property states, property the parties acquire during marriage falls under the definition of this ownership system. All other property is considered separate, including property spouses own prior to marriage that has not been co-mingled, or mixed, with community assets.
There are eight states which recognize a community property system of ownership: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington.
Central to the concept of community property is the idea of equal management and control of the married couple's assets. It's this concept of equal management and control which is critical to creditors' rights, and will ultimately determine whether credit ynions are able to collect their debts.
Here are some common questions facing many credit unions in noncommunity property states regarding debt collections.
* What is the appropiate course of action to take when a member defaults on a loan before or after moving to a community property state, and then marries?
* What about a member who is married when the the defaulted loan is made but the members spouse didn't sign the loan documents-and then the couple moves to a community property state?
* Is it proper to sue for collection only the signing party or also the nonsigning spouse?
* What property can be attached to satisfy the judgment if only one of the spouses signed the loan agreement?
* Should the credit union file suit in the state the contract was entered into or in the state to where the member moved? In most jurisdictions, debts incurred outside a community property state during marriage can be enforced against the community. In most instances, the signature of one of the spouses is all that's necessary to bind the community. The most common exceptions to this general rule are contracts involving real estate, and for indemnity, guaranty, or surety.
However even if the signature of one spouse is all that is required to bind the community in contract, most jurisdictions require the joining in a suit for collection of the nonsigning spouse be able to collect from community assets. Failure to join both spouses in the suit will often result in a worthless judgement because the credit union would then be limited to attach only the separate property of the spouse who was sued. Most married couples own all of there property as community assets. If you want to collect, you need to be able to get at the community assets.
The precise method for suing a nonsigning spouse on a premarital debt in order to attach the signing spouse's portion of community assets varies from state to state. It must be done correctly in order to be effective
When bringing suit in a community property state, the judges in that state will be familiar with community property law. This gives your credit union an advantage when you name a nonsigning spouse in your complaint to collect a debt. You won't be required to explain to your local judge why you named the nonsigning spouse in the complaint. In addition, your local attorney, who probably is not familiar with community property law, wont have to charge you for all the time and research needed to learn about such law prior to obtaining your judgement to collect the debt.
Plus, you will probably save time and expense it litigation. That's because if the members attorney isn't familiar with community property law, he or she will probably put up a fight when you sue the nonsigning spouse- all of which will unnecessarily complicate matters.
Another good reason for bringing suit in the community property state is practical debt collection. If you obtain judgment in the noncommunity property state you first need to perfect or certify the judgment in the community property state prior to instituting garnishment proceedings or executions against nonexempt property. If you bought suit in the community property state in the first place, you save a step in the process.
Garnishment can occur more quickly and you will be on the road to collection with far less effort and cost than would be otherwise required. In other words, if you sue in your state, after you get through paying a local attorney to obtain the judgment, you still have to hire an attorney in the community property state to certify the judgment before you can collect anything. And if your local attorney didn't get it right, you might not collect anyway. Why not avoid the problem and start things out right by bringing suit in the state where the member resides?
Here are some recommendations for choosing a lawyer outside your state
* Contact the credit union league in the state where you need representation. Chances are it has a good idea who can competently assist you. If the attorney it recommends doesn't handle the type of case you need help with, the attorney may be able to refer you to someone else. Leagues are a valuable resource. Use them-that's what they are there for.
* Call the collections department at a larger credit union in the city where you need representation. It can refer you to a lawyer. And again, if that lawyer doesn't handle the type of case you need help with, he/she can probably direct you to someone who does.
* Ask your credit union's lawyer for recommendations. Your lawyer or your lawyer's acquaintances might know someone who can assit you.
We've discussed some of yhe things credit unions in noncommunity property states need to know when defaulting members move to community property states. It's always important to remember issues involving the nonsigning spouse to maximize your collection results. Unless you are able to attach a sufficient amount of a members nonexempt assets in your state, or unless you have another good reason to bring suit in your state, consider bringing suit in the state the member moved to. It will save time and money.
Now what does a credit union in a community property state need to know when a member defaults on a loan then moves to a noncommunity state? Sounds like a good topic for an article I have yet to write.
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