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Dividing Debt in a California Divorce
In a divorce, couples often come up with a plan to divide all the goods that they’ve accumulated during the marriage but they forget about the debt. People don’t often think about the debt as something to be divided, simply because it’s not talked about as often as “who gets the house.” Since California is a community property state, the couple shares in both the assets and the debts that are legally incurred during the marriage. This means that even if only one spouse took out a mortgage with only his/her name, both spouses are equally responsible for the debt during marriage and after a divorce. Now, how is debt split in a California divorce?
Dividing and Paying All Joint Debt
Couples usually have joint credit cards or loans during a marriage even if only one spouse uses the card or benefitted from the debt. Creditors simply don’t care who spends the money, they just want to be paid back. It’s nearly impossible to have the creditors release one spouse from the responsibility of repaying the debt, but there is a way around this. For instance, the spouse responsible for the debt may be assigned, by the court, to be responsible for the debt in the divorce ruling. The court may assign more debt or more property to balance what each spouse gets. In a divorce judgment, community property and debt should be divided as fairly as possible so that both parties end up with an equal amount (of both property and debt). All competent family attorneys in California can consult with you about getting a fair amount of property and debt.
It’s not always clear how debt might be divided. A couple division of joint debt scenarios are:
Is Separate Debt Still Separate?
California does recognize that there is separate property and debt too. Debt that an individual has before entering the marriage is not commingled with the community debt, as is the rule for separate property. The law doesn’t force individual debt to be paid by both parties in the marriage; in a divorce, that debt will still belong solely to the responsible individual. There are also some instances where a spouse incurs a debt that may constitute a breach of fiduciary duty to the other spouse (e.g., the spouse incurring the debt was recklessly gambling with community money). You should consult with an attorney about whether a debt incurred by one spouse should be solely attributed to him/her.
Notwithstanding the foregoing, it may be best to attempt in paying off as much of the marital debt as possible before the divorce is final so that there is less need to hire accounting experts to figure out how to best allocate the assets and debts. This might mean using your own (separate/individual) money to pay off community debt. When you use your own assets to pay off this shared debt, you may also be able to receive reimbursement from the community property in a divorce. What is able to be reimbursed is not always black and white. Needless to say, it’s smart to talk to a professional like an experienced, divorce lawyer before using your own property to pay off marital debt.
When Assets have Negative Value
When an asset like a house, loses its value quicker than the mortgage is paid off, it has a negative value. Basically, the mortgage exceeds the fair market value. When this happens, the court can give the house to one spouse but that will come with the responsibility of paying the rest of the mortgage as well. This negative asset value house wouldn’t be split equally between the 2 spouses because at a negative value, there’s nothing to split. This isn’t always clear, so there is opportunity to be cheated if you are awarded the house. The best way to ensure you’re actually getting value is to talk to a divorce lawyer who knows how to deal with calculating asset values and debt.
Is Filing Bankruptcy an Option?
The issue of debt in a divorce case can lead one or both spouses to file for bankruptcy. When this happens, it can become quite a mess. If one spouse decides to file bankruptcy in the middle of the divorce case, it screws up the division of assets. The family court won’t divide up the real estate, pensions, stocks, or mutual funds unless it receives permission from the bankruptcy court.
In the case of In re Marriage of Clements, the divorce court gave 2 credit card debts to Wife as part of the equal division of community property. She also received $1,000 per month for spousal support and $300 per month for child support. Eventually she started defaulting on those credit card payments after the divorce, then declared bankruptcy. The banks couldn’t go after her because of her bankrupt status, so they went after the ex-husband. He had to make the monthly payments on these cards. Luckily for them, they had an investment that paid out and each received over $7000.Wife quickly spent over $1000 on living expenses, but the remaining $6,000 was restrained. Even though she had filed for bankruptcy, the court ordered her to use the remaining funds to pay off the credit card debt to free her ex-husband from having to pay the balance for which she was responsible. The lesson here is that bankruptcy is not an excuse for paying debt, if you are able to. Of course, everybody’s situation is different, but the court will make the fairest judgment possible.
Tips to Paying Off the Debt
Divorce can be a complicated thing in itself, when you add in the responsibility of sharing debt with an ex-spouse it can become maddening. Three-quarters of Americans have financial stress. Going from a two-income household to a single income may devastate your future, but with a good plan you can get through it comfortably. Below are a few tips to deal with debt in a divorce:
What Happens to Our Individual Credit After a Divorce?
This is an extremely unfortunate truth about credit after a divorce, but it can be negatively affected even if you pay your share of the debt on time. If your former spouse does not pay his/her part of the community debt, it will likely affect your credit score. The best way to ensure you protect your credit is to make sure that all credit is paid on time, even if you have to cover for your ex’s portion and later seek reimbursement from the Court.
Your Spouse Won’t Agree to Settle Debts Fairly
Just like in a contested divorce, you have the option of using a mediator when deciding on division of debt and property. A mediator can help guide you and your spouse solve any disagreements regarding financial things. Private mediators are not always lawyer, they can be a health professional or any other third-party, neutral person who can fairly facilitate conversation. Nip it (financial issues) at the bud and you’ll be on your way to dealing with debt after a divorce much more comfortably if you both agree to the terms. It is possible to manage debt after a divorce.
A party may also obtain a quick and easy divorce if the spouse fails to file a response in the case and therefore defaults. The filing spouse serves their spouse with the Petition for Dissolution of marriage and if he or she does not respond with a formal Response to the court, then the case will proceed by default.
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