Lenders: Beware Of The 'Two-Dollar Bankruptcy'

Most lenders usually only involve legal in problematic or highly-complicated transactions; otherwise, business would grind to a halt. Most loan documents are created using form software or are reused from prior transactions. The unwary lender, however, may inadvertently create an enforcement trap. Even with careful underwriting, some borrowers will default — it is inevitable. If that defaulting obligation is secured by a personal guaranty from an Arizona resident, there may be enforcement problems.

For many years, an Arizona debtor could place his/her future wages and commingled community property assets outside of the reach of his/her creditors simply by getting married. Thus, getting married in Arizona has been colloquially referred to as a "two-dollar Bankruptcy." The term-of-art "two-dollar Bankruptcy" refers to initial cost of an Arizona marriage license, which was at one time two-dollars. Although the scope of the "two-dollar Bankruptcy" has been significantly narrowed though legislative and case law developments, its protections subsist in certain contexts. One of these contexts is personal guaranties. Under Arizona law, both spouses must execute a personal guaranty to bind the marital community. See Ariz. Rev. Stat. § 25-214(c)(2); Rackmaster Systems, Inc. v. Maderia, 193 P.3d 314 (Ariz. App. 2008). This limitation has been extended to non-Arizona resident debtors in the context of Arizona enforcement proceedings (see Phoenix Arbor Plaza Ltd. v. Dauderman, 785 P.2d 1215 (Ariz. App. 1989)) and Arizona debtors in the context of non-Arizona enforcement proceedings (see G.W. Equipment Leasing, Inc. v. Mt. McKinley Fence Co., 982 P.2d 114 (Wash. App.1999)). Thus, under Arizona law, if only one spouse executes a personal guaranty, only that spouse's separate marital property is subject to the claims arising under that guaranty. Since most assets acquired and income earned after the formation of a marriage are deemed community property, under such circumstances there will be a much...