When an individual files for bankruptcy protection, it is very important to have an understanding of bankruptcy law. Failure to adhere to established rules and practices can quickly complicate a personal bankruptcy case. This is especially true for California residents who also have family businesses. An example from another state demonstrates the complexity of the issue.
When his wife fell ill, a man assumed responsibility for managing her multiple business interests. In doing so, he failed to maintain separation of the couple's personal wealth from the wife's business accounts. He and his wife were issued periodic paychecks from the businesses, which were then deposited back into the business accounts. Those accounts were then used to pay for the man's personal expenses, including a gym membership, insurance premiums, cable television service and other bills.
The man eventually sought personal bankruptcy protection. He intended for the bankruptcy to only address his personal debt and assets. However, because of the level of commingled funds that was in place, the Bankruptcy Court felt that his wife's businesses were simply alter egos for the man himself. Therefore, when a lawsuit was filed asking that the wife's business assets be included within her husband's bankruptcy estate, the court agreed.
As a result, the man's wife has been brought into his personal bankruptcy case. Had the couple made different decisions, it is possible that her business interests could have been kept separate from the husband's personal bankruptcy. Unfortunately, the couple will now have to use at least some of her wealth to pay back his creditors. That outcome should serve as a warning to California residents in similar circumstances.
Source: Bloomberg BNA, "Sick Wife Drawn Into Husband's Bankruptcy Troubles", Stephanie Cumings, Dec. 21, 2015