It is an unfortunate yet well-recognized fact that the financial pressures associated with debts are a significant reason couples opt to divorce. That choice, however, does not make those pressures disappear. Conversely, debt in a divorce can make the whole process more complex. The division of marital assets is typically the main focus of a divorce, and rightfully so. Despite this, the division of debts can have a more significant and longer-lasting impact on the outcome of the divorce rather than the division of assets.
Remember that the net worth of an individual – or a couple – equals the sum of their assets minus the sum of their debts. Merely possessing, for example, a luxurious home can actually decrease one’s net worth if it is “underwater,” a situation in which the debt from the mortgage is greater than the home’s current market value.
We want to help you understand the various matters surrounding splitting debts in divorce. More specifically, we want to discuss how you can proactively protect your finances and not become a victim of your spouse’s financial mismanagement in that process.
How is debt divided in a divorce?
Each state has its own rules governing how to divide a marital estate. Most states follow the “equitable distribution” model, in which the objective is fairness, not necessarily equality. In the case of splitting debts in a divorce, the partner with the greater earning potential may be assigned a greater share of the debt, even if they were not personally responsible for incurring much of that debt.
In California, however, the laws are different. California is a “community property” state, where the marital estate is divided 50-50 between each spouse.
Both equitable distribution states and community property states recognize the difference between assets and debts owned jointly and those owned singly. Thus, the first step to dividing the estate – including splitting the debts – is to determine who owns what.
California community property rules are as follows:
- Assets and debts obtained by either spouse during the marriage are labeled “community property” and are considered jointly owned. Naturally, this is what gets split in the divorce.
- Assets and debts obtained by either spouse before the wedding date and after the “date of separation” are labeled “separate property” and are shielded from division in the divorce.
There are exceptions to these generalities, of course. Since we are focusing on debts, one such exception would be a student loan. The purpose of a student loan is to provide the borrower with improved employment potential, a condition that will be with them for the remainder of their working years. Therefore, even if someone obtains a student loan during their marriage, it will likely remain that spouse’s separate debt in a divorce, meaning they will be solely responsible for paying it off.
It is also important to note the meaning of the “date of separation.” In California, this does not mean the date a court certifies the divorce or legal separation. Instead, two criteria determine this date of separation:
- A spouse informs their partner of their intention to end the marriage. This does not need to be verbal or in writing. For example, an action such as removing the wedding ring and leaving it on the dinner table may be sufficient to meet this criterion.
- After giving such notice, the actions of that spouse must remain consistent with their intention to end the marriage.
The criteria stated above show how important it is for each spouse to be mindful and take note of the condition of their relationship even before finalizing the divorce. Consider the following example: After being informed of Spouse A’s intention to divorce, Spouse B, in an attempt to feel better, purchases an expensive item for themselves using a jointly owned credit card. If Spouse A can prove that Spouse B bought the item after Spouse A gave their notification of intent to divorce, the liability of that purchase will remain the responsibility of Spouse B. If Spouse A cannot prove this, however, that debt would be divided in their divorce, and both spouses would be equally responsible for its liability.
Depending on the length of the marriage and the complexity of the estate, the process of listing, valuing, and categorizing what is jointly and individually owned can be a tedious and laborious (costly) task. Even once this is complete, the community property rule does not mean that each individual asset and liability is divided 50-50. Instead, the total value of the property (total assets minus its total liabilities) is divided in half. The individual assets and liabilities are then distributed to each party so that they each receive half the total value.
As you can imagine, this may take some creative juggling. It is far better for the couple to make those allocation decisions themselves when possible to avoid being court-ordered to do so.
How can I protect my finances in my divorce?
Be “in the know.”
While only some people genuinely enjoy keeping copious records of their financial transactions, doing so is essential to fully knowing everything you own and owe. It is equally vital for you to know everything your spouse owns and everything your spouse owes.
If you are facing a divorce, you should first start making a list of your assets and liabilities. Some items on that list will be obvious (your home, for example), while others may not be immediately obvious, such as a joint credit card account that you never use but your spouse does use.
Generally, the more you and your spouse can cooperate, the better. Operating in total honesty and transparency is necessary to keep the process moving smoothly toward a satisfactory conclusion. Any attempt to hide either assets or debts is not only a crime subject to penalties (including prison time), but it is also financially dangerous; that secret loan your spouse obtained while still married to you will partially be your responsibility when you divorce.
You and your spouse will each need to submit verified financial disclosures to each other as a part of the overall divorce settlement. Make sure yours is complete. Ask your attorney to investigate if you suspect your spouse is hiding something important.
The best practice is to separate your financial instruments from each other as soon as possible. Any liquid assets (e.g., savings accounts) and liabilities should be closed and their value divided into two individual accounts, when possible. For example, if you have any joint credit card accounts, you should close them, divide the debt, and transfer those balances to new, individual accounts.
The bottom line is that you need to do anything it takes to shield your finances from potential misuse by your spouse, even if unintended. Concerning the division of assets, some items will require hard choices. The family home is a classic example. In some instances, you can sell the house and split the proceeds without any issues. However, if you have any children, it may be best for one spouse to retain the house in the children’s best interest. In that case, it would be wisest to refinance the home with a new mortgage in whomever’s name will maintain ownership. In a situation like this, one spouse’s assumption of the house must be balanced with what the other spouse receives from the estate.
Another goal should be to reduce your overall debt load as much as possible. It is best to promptly pay off these debts, even if it digs into your assets significantly in doing so. Ultimately, the more debt you can eliminate early on, the easier your life will be in the long run.
Creditors have rights, too, and their rights to repayment are not revoked due to divorce. Be watchful, as they have ways to make sure they get what is theirs.
If it is impossible to isolate your finances from your spouse’s fully, you will want to keep a close eye to ensure that they meet their debt responsibilities. If your name is still on the debt, you should still have access to any accounting to see if payments are being made on time. If you are concerned about your spouse’s ability to manage these payments, you may be able to get an order for automatic payments from their accounts.
Whatever the case may be, keep a close eye on your credit report; your credit score will take a hit just as much as your spouse’s if they fail to pay on time.
Whether you think your financial picture is simple or complex, you should seek competent assistance to ensure no stone is left unturned and your matter is handled with skill. At Silva & Associates, our highly trained and experienced divorce attorneys have seen many cases like yours. We have the contacts and the tools necessary to help you protect your finances in your divorce process. Contact us today, and we will get right to work for you.
Divorce and debt responsibility FAQs
Q: How can I make sure all assets are identified?
A: Having an attorney can help you ensure all assets are identified. Community property is defined as all property, real or personal, wherever situated, acquired by a married person during the marriage while living in the state of California. Separate property is any property acquired separately before the marriage or after separation. In California, community property is divided equally, while each spouse keeps his or her separate property. Experienced divorce attorneys possess a variety of skills to help uncover hidden assets.
Q: How do I protect my assets if I am getting married?
A: If you have considerable assets that you’re seeking to protect as you head into a marriage, consider a prenuptial agreement, or “prenup.” Although once looked upon negatively, pre-nuptial agreements have become commonplace in today’s world. A prenuptial agreement is a written contract entered into by two people prior to marriage or a civil union that enables them to determine what happens when their marriage eventually ends, either by death or divorce. The agreement can address a few issues – like child support, spousal support, retirement accounts, property ownership and savings – or it can specifically address only a few important items.