DIVIDING DEBT IN DIVORCE WHO PAYS WHAT?

When people consider the financial implications of divorce, they often think about the division of property and personal assets, spousal support and child support. Rarely do they consider that they will also need to divide debt. And that’s where things can turn sour. Along with a few other states, California is a “community property” state, which means that any assets acquired and any debt incurred by either spouse during the marriage (but before the date of separation) belong to both spouses equally, even if only one spouse incurred them. Unless spouses have a prenuptial agreement in place, the court will order that all community property and all community debt be divided equally. This means that any credit card bills and loans in only one spouse’s name are still owed by both spouses. Courts encourage separating couples to work together on separating community property and debt fairly, so that each spouse owns about the same value in assets and debt in the end.

So how do spouses divide community property and debt? They first make a list of everything they own, including community property, separate property, and the fair market value of each asset. They then do the same with debt, which can include car loans, property loans, cash loans, credit card bills, and student loans. They use this information to complete the Schedule of Assets and Debts form, a court requirement for all divorces. Since each spouse completes this form on his/her own, it’s is very important to be honest and not keep anything hidden, especially in a community property state like California. A spouse can be held responsible for any debt incurred by the other spouse, even if he/she weren’t aware of it and didn’t sign any contract. This is why using current credit reports can be very helpful when evaluating community debt during separation.

Next spouses compare their list and see if they agree on what is community property and separate property, and the value assigned to it. They also need to decide how the debt will be divided. Sometimes spouses look at the total debt amount and divide it in half. For example, one spouse will take half the credit cards, and the other spouse, the other half. This can lead to serious problems because the people you owe money to are not obligated to respect your agreement and can go after the specific spouse who signed the original contract, even if that spouse is not responsible for the debt anymore. The best way to avoid this problem is to pay off as many debts as possible, then transfer any debt left in separate credit accounts. Once separating spouses have agreed on the division of community property and debt, they can enter their results in a marital settlement agreement (MSA).

Of course, these financial discussions may not go as smoothly as expected, especially during such an emotional experience as a divorce. That’s when mediation can be handy. An experienced divorce mediator will help spouses work together to divide community property and debt fairly and equitably, and solve any disagreements. The same divorce mediator can also help couples with other issues of their divorce, such as child custody and spousal support, so it’s important to know that help is available.