A Spouse’s Debts

In a divorce, dividing the marital pie – the assets and liabilities – depends on where the partners file for divorce; whether he or she lives in a community property or equitable distribution state. Assets are divided in half or shared equitably.

In the community property states, both spouses are liable for most debts incurred by either spouse during the marriage. In the other jurisdictions, which are states that follow common law property rules, debts incurred by one spouse are usually that spouse’s debts alone, unless the debt paid for a family necessity, such as food or shelter for the family or tuition for the kids. Some states have subtle variations about joint and separate debts. These rules also apply to same-sex marriages and to same-sex domestic partnerships and civil unions in states where those relationships are the equivalent of marriage.

In community property states – Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, and Alaska (if spouses agree to consider their assets community property) – most debts incurred by either spouse during the marriage are owed by the community, which is the couple, even when only one spouse contracted the debt.

The key here is during the marriage. If one spouse incurs a debt as a single person, such as a student loan, and then marries, that debt does not automatically become a joint debt. An exception is where a spouse signs on to an account as a joint account holder after getting married. Moreover, some states, such as Texas, analyze who owes what debts by identifying the debtor, the debt’s purpose, and when it was incurred.

After a legal separation or divorce, the partner who incurred the debt is responsible for it, unless the debt paid family necessities or to maintain jointly owned assets, for example, to repair a leaking roof on the family home or if the spouses keep a joint account.

In community property states, a couple’s income is shared as well. All income earned by either spouse during marriage, and property bought with that income, is community property, owned equally by husband and wife. Gifts and inheritances received by one spouse and separate property owned before marriage are the separate property of that spouse. All income or property acquired before or after a divorce or permanent separation is also separate.

In a community property state, creditors of one spouse can go after the assets and income of the married couple to make good on joint debts, which are most debts incurred during marriage. For example, when Rhonda’s restaurant goes under, she owes $45,000 to purveyors. Because Rhonda and John, her husband, live in California, which is a community property state, her creditors can sue both her and her husband to collect the debt. Rhonda no longer has an income to take, but John’s is significant. Therefore, Rhonda’s creditors garnish $3,000 of John’s monthly income until the debts are paid off.

Creditors can go after joint assets in a community property state no matter whose name is on the title document to the asset. For example, a business owner’s name may not be on the title to her spouse’s boat, but in most community property states, that won’t stop a creditor who can sue to take the boat to pay off the business owner’s debts when it was purchased with community funds, and not separate funds.

In the case of a spouse’s separate debt, such as one spouse’s child support obligation from a prior marriage, or a debt in one spouse’s name only where the spouse hid the fact that he or she was married, a creditor can go after only that spouse’s half of the community property to repay it.

Couples in community property states can remove a spouse’s liability by signing an agreement with each other to treat debts and income as separate property. A pre- or postnuptial agreement makes sense when one spouse goes into business. Pre- or post-nuptial agreements can be executed to protect a spouse from liability for existing business debts, only from liability for future business debts. A person can also sign an agreement with a particular store, lender, or supplier, stating that the creditor may turn solely to one spouse’s separate property for repayment of any debt, essentially removing protecting the spouse from any obligation or debt from the contract – if you can get the other party to agree.

Even if only one spouse files for Chapter 7 bankruptcy in a community property state, all of the eligible community debts of both spouses will be discharged.

By comparison, in a common law property state, which any of the other 42 jurisdictions, debts incurred by one spouse are that spouse’s debts alone, and income earned by one spouse does not automatically become jointly owned.

Debts are joint when the debt benefits the marriage, for example, the debtor food, clothing, child care, shelter) or the debt was jointly undertaken, for example, if both spouses signed a contract requiring them to make payments on the debt, if both spouses’ names were on an account or title to property, or if a creditor considered both spouse’s credit information before making the sale or loan. The same rules hold true after permanent separation but before divorce. All other debts, such as a business debt from one spouse’s business or a car loan for a car whose title is in one spouse’s name, are considered a spouse’s separate debts.

Generally, in most common law states, income earned by one spouse during the marriage belongs to that spouse alone, if it is kept separate. And any property bought with separate income or funds during the marriage is also separate property unless the title to the property is put in both spouses’ names. In addition, gifts and inheritances received by one spouse, as well as property owned by one spouse before marriage (and kept separate), are the separate property of that spouse.

However, if income earned by one spouse is put into a joint bank account, that income or property becomes joint property. If joint funds are used to buy property, the property is also owned jointly unless title is taken in the name of one spouse only. Jointly owned property can include equity in a jointly owned house, household goods, jointly owned vehicles, and jointly owned bank accounts, retirement plans, and stocks or mutual funds.

If a car is in only one spouse’s name, it’s that spouse’s separate property. If a house is in both spouses’ names, the house is joint property, even if one spouse doesn’t pay the mortgage.

In a common law property state, creditors of one spouse can go after the income or property of the other spouse – or joint property – only if the debt was incurred for joint purchases or for purchases that were made for family necessities. In some common law states, a creditor can also go after joint property to pay the separate debts of one spouse even if the debt was not family-related but in most states a creditor can take only half of the money in a joint account.

For example, Malcolm’s auto parts business fails owing $30,000 to suppliers and other creditors. Malcolm runs the business by himself, without the help of his wife, so the business debts are considered his separate debts. Because Malcolm lives in Pennsylvania, creditors cannot garnish his partner’s income or take his partner’s separate property, though they may be able to sue to take money from the joint bank account Malcolm shares with his wife. Whether the creditors can go after other property held jointly by Malcolm and his wife, such as the family home, depends on the state they live in and how they hold title to the house.

In about half of the common law property states, a creditor cannot go after certain joint property to pay the separate debts of one spouse: If a couple holds property in “tenancy by the entirety,” a creditor can go after the property to pay only joint debts, not separate debts of either spouse. And in some states, such as Florida, consider most joint property to be held in tenancy by the entirety and so is immune from being taken to pay one spouse’s separate debt.

For example Peter rents party supplies and construction equipment in Albany, New York, but his business is failing. Peter’s wife Bessie is an independent jewelry appraiser who makes a good living. When Peter can’t pay his main supplies, the creditor threatens to sue both him and his wife. Because Peter and his wife hold title to their house in tenancy by the entirety, the creditor cannot put a lien on the house and force its sale as long as Bessie is alive. If Bessie and Peter were to sell the house, however, the creditor would have to be paid off with Peter’s half of the proceeds.

A spouse should not guarantee business debts. Unless a spouse cosigns a loan or personal guarantee, he or she will not be liable for your business debts he or she keeps the money and property separate.  For example, when Scott’s business fails, he owes $53,000 to suppliers. Because Scott and his wife Lisa live in a state with common law property rules, these creditors can sue Scott to collect the money owed, but cannot go after Lisa’s inheritance. In some states, the creditors will be able to go after joint assets such as a joint bank account.

If only one spouse files for Chapter 7 bankruptcy, only that’s spouse’s joint and separate debts would be discharged; the other spouse’s separate debts would not be discharged.

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