Characterization, Valuation, and Division of Community and Separate Property Debt

Unpaid debt– credit card debt, car loans, loans on homes worth less than the debt – are difficult and stressful subject matters.

Financial issues can be a significant cause for the termination of a marriage or domestic partner relationship. In a dissolution action, so long as the value of the community exceeds the community debt, the court MUST divide the net community assets equally. The manner in which such division occurs—i.e. who gets the stock or the cars, or whatever other community property there may be, is discretionary with the judge, primarily based on fairness and equity: But the net assets—defined as a community where the assets exceeds the debts–must be divided equally.

If, however, the value of the community debt exceeds the value of community property, there is no requirement that the judge divide the community debt equally between the spouses or partners. Generally, a judge will assign more debt to the spouse who is earning more, or has greater earning capacity or greater wealth. Or, the judge could assign a debt to the spouse or partner who incurred the debt. If the debt is for gambling, drugs, alcohol or some other seemingly wasteful purpose, the court is likely to assign that particular debt to the spouse or partner who incurred it.

Spouses and/or domestic partners should be aware that even if the court assigns a debt to one spouse or partner, that assignment is not binding on the creditor to whom the debt is owed. If there is a default by the spouse or partner assigned that particular debt, the creditor can pursue the other spouse to collect the debt, even years after the divorce.

Most people do not realize that community property acquired during marriage can be chargeable for the separate property debt incurred by one spouse or partner before marriage. Example: One spouse owes $25,000 in credit card debt or income taxes prior to marriage. Following marriage, the spouses purchase a home. The pre-marriage creditor who is owed $25,000 can reduce the debt to a judgment–in the case of taxes a tax lien–and the lien and/or judgment can be recorded against the community property home.

This is one reason to consider a premarital agreement. Spouses can also protect their otherwise community property income from the premarital debts of the other spouse by keeping that income in a separate account in his or her own name, without any access by the other spouse who has the premarital debt. Premarital creditors then cannot levy or obtain the other spouse’s income so as long as the income is deposited into a separate account.

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