There are lots of different issues to settle during a divorce process. Financial matters can be extremely debatable, especially if spouses aren’t willing to negotiate and compromise. When it comes to handling finances, partners are mainly concentrated on how to divide assets, disregarding the importance of splitting debt in divorce. Such an attitude to financial liabilities may have costly consequences.
Debts accumulated by spouses can take various forms. The most frequent types are mortgages, car loans, business loans, credit card debts, medical bills, and student loans. Frequently, it isn’t clear who is responsible for which debt, so it is tricky to define who will cover them in the post-divorce period.
What happens to debs in divorce in general? In the best-case scenarios, partners manage to handle the debts on their own and specify their decisions in a settlement agreement. Otherwise, family courts follow established guidelines for defining how debts should be divided between divorcing spouses. Such regulations vary between jurisdictions of equitable and community property states.
In this article, you can find a detailed overview of how debt works in a divorce in California to understand your further steps and come up with a proper divorce plan. We will focus on the connection between marriage dissolution and debt allocation, the basic factors judges consider when naming a spouse responsible for paying debts, and the probable complexities that arise if divorce leads to bankruptcy or the other way around.
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Divorce and Debt – Does One Have Anything to Do with the Other?
When people are filing for divorce, they separate not only their lives but also their financial obligations. Such a move implies sharing debts that were accumulated by spouses during marriage. Some couples mistakenly believe that once they are officially divorced, they are no longer responsible for their ex-spouse’s debts. However, there may arise unpleasant surprises, so it is necessary to approach the task of dividing debt in divorce seriously and accurately.
In most cases, the division of debts during marriage termination is as complicated as the distribution of assets. When dealing with debt in divorce, you should answer the following questions:
- What joint debts do we have?
If spouses accrue debts during marriage together, they will be classified as joint debts. It means that both partners will be responsible for repaying them after the divorce is officially finalized. But if one spouse fails to cover their share of debts for any reason, creditors may pursue the other spouse to get the money. It happens because creditors perceive debts as co-owned and don’t care which spouse borrowed money and who will pay the whole sum.
To avoid potential hardships, it is crucial to reach an agreement about debts during or even before divorce. For example, spouses may pay off their marital debts before they officially split. If one spouse can’t pay their share, the other may negotiate with a creditor to take over the debt or pay on behalf of the other spouse.
- Do we live in an equitable distribution or community property state?
How is debt divided in divorce depends on where the case is filed and reviewed – in a community property or equitable distribution state.
In community property states like California, any debts obtained during marriage are seen as joint assets. Therefore, both spouses are equally in charge of covering them. Under such an approach, partners must repay debts irrespective of whose name is on the account.
On the other hand, in states with equitable distribution laws, debts are divided in a manner that is recognized as fair. However, fair doesn’t always mean exactly equal. Judges in such states take into consideration several factors when dividing debts. Typically, they consider the duration of a marriage, the earning capacity of each partner, possible changes in salaries in the near future, the contributions made by each spouse during their marriage, etc.
In both community property and equitable distribution states, debts acquired before marriage or after separating are generally viewed as separate responsibilities. So, the spouse who took them on must repay the debt. However, there are situations where this principle doesn’t apply.
For instance, when one spouse secures a mortgage before marriage and then refinances it during the marital life, using the money for the family’s benefit, it may become a joint debt. Besides, if one spouse borrowed finances to cover essential family living expenses, the other spouse may also be responsible for paying off the debt, regardless of whether it was accrued before the marriage or after separating. Such debts are treated this way because the main motive for gaining them is to support the family. It is the responsibility of both spouses to help each other throughout the marriage.
- What are the possible financial implications and problems of our debt-division decisions?
Underestimating the importance of debt division during a divorce process can evoke many regrets in the future. How spouses resolve such matters directly impacts their credit scores and financial stability once they are single. For instance, if a couple doesn’t clearly specify who will repay what debts and firmly abide by the plan, they may lose their property and savings as creditors can take them away to cover debts.
It may be a good idea to contact a professional divorce solicitor or financial advisor to develop a strategy for debt division in your specific situation.
To avoid any financial problems during and after divorce, you can take such steps:
- Close joint accounts and open new ones just in your name. This is necessary to prevent your soon-to-be former partner from adding more debts to your shared account.
- Get rid of joint debts. If doable, settle any shared debts before the divorce process is over. Thus, you can avoid disagreements about who should pay back which debts later.
- Keep tabs on your credit report. Make regular audit of your credit report to make sure all debts are paid as agreed. If you find any mistakes or discrepancies, address them promptly.
- Be organized. Save all your financial papers and records while you’re going through a divorce. Keep copies of important documents and any letters or emails about your agreements with your ex regarding debt splitting.
Divorce Settlement Agreements
Preparing a divorce settlement agreement is a great way to speed up the whole process and minimize possible misunderstandings after the marriage is terminated. Such documents are particularly beneficial when spouses want to distribute liabilities between them fairly. Typically, a marital settlement agreement in California and other states is viewed as a legally binding contract between the parties, outlining the terms of debt division. Some spouses reach a compromise themselves, while others end up with a mutually satisfying agreement during mediation.
Keep in mind that every debt and property settlement agreement is unique, as it reflects the specific circumstances of the couple involved. Still, when it comes to distributing debts, there are several key aspects to consider.
First of all, it is obligatory to list all your debts as a couple. These can be credit card balances, mortgages, student and car loans, etc. Next, spouses should clarify their decisions on how all available debts will be handled. There are different ways to split debts:
- Spouses divide the debts equally, no matter who incurred them.
- A wife is responsible for covering certain debts, and a husband has to deal with the others.
- Debts are divided based on each spouse’s income or ability to pay. Thus, a spouse who earns more will take on a bigger part of the debt.
- Parties can agree to sell their joint assets and use the money to pay what they owe.
- Partners can mutually decide to refinance specific debts, like a mortgage or car loan, to remove one spouse’s name from the debt obligation.
- A couple can use a combination of methods listed above.
California residents have to stick to the rules outlined in the state’s Family Code when writing divorce agreements. According to California law, debts accrued while married are seen as community property jointly owned by both spouses. Therefore, even if one spouse agrees to take on a specific debt in the divorce settlement agreement in California, the other spouse may still be legally responsible for it if the partner fails to pay off the debt as defined.
Both parties must sign their agreement and submit it to the court for approval. When starting an uncontested marriage dissolution, you may expect your divorce settlement agreement to be included in a Final Divorce Judgement.
Who Is Responsible for Debt after Divorce?
If divorcing spouses act cooperatively at every stage of marriage dissolution, they can usually agree on how to divide the debts based on their unique requirements and wishes. The judge will just need to approve their agreements if they are reasonable. However, in contested marriage dissolution, debt distribution along with other matters are resolved during court hearings, and the judge has a final say.
Overall, family courts consider several legal aspects when determining which spouse is accountable for a certain debt after divorce.
- A key aspect is whether the debt appeared before or during the marriage. Debts accumulated before marriage are usually seen as individual responsibility. So, the spouse who incurred the debt must repay it. Conversely, debts acquired during the marriage are considered joint responsibilities, and both spouses should share repayment.
- Another thing family courts look at when deciding how debt is split in divorce is whether the debt was for the benefit of both spouses or just one. For instance, if one spouse got a car loan to buy a vehicle used by both during the marriage, the court may say it’s a joint debt, even if the loan was in only one spouse’s name.
- Family courts evaluate how much money each spouse makes and what individual financial assets they have to figure out if they can pay off certain debts. If one spouse earns more or has more money saved up, they may have to take on more debts.
- If one spouse has committed financial wrongdoing, like hiding money or spending marital funds improperly, it can affect how debts are divided. The court can oblige the law-breaking spouse to pay more of the debts to make up for their actions.
- Family courts may also consider prenuptial or postnuptial agreements when ruling out debt-division matters.
Bankruptcy and Divorce
Filing for divorce and bankruptcy at the same time can make the transitional life period for both spouses even more troublesome. One of the major difficulties that arise is the expanded timeframe and postponed court decisions. For instance, if either spouse claims to be bankrupt before a divorce is finalized, the judge has to deal with financial issues in the first place, and only after they are settled, they will focus on divorce proceedings. Therefore, a couple has to wait longer to regain their single status.
Another challenge related to divorce and bankruptcy is that it becomes more confusing to manage debts. For example, when one of the partners opts to file for bankruptcy after divorce, they may be financially incapable of paying the debts outlined in a Final Judgement issued by the court or divorce settlement agreement. Therefore, the other spouse may have to step in and take care of debts if possible, or spouses will have to look for other methods to deal with this issue. Generally, such cases are negotiated in the court. Though a bankrupt spouse may be legally exempted from covering certain debts, such payments as child custody and spousal support aren’t discharged.
An important aspect related to bankruptcy and how it affects debt splitting is its type. Spouses can file for 2 kinds of bankruptcy:
- Chapter 7 bankruptcy is alsocalled liquidation bankruptcy. Spouses need to sell their joint assets to pay off debts. If one or both spouses file for this bankruptcy type before getting a divorce, they can manage debt division in a simpler manner because they receive money to cover their debts. So, when they start a divorce process, there will be no debts to worry about.
- Chapter 13 bankruptcy is known as reorganization bankruptcy. Partners need to work out a plan to pay off debts over a few years – usually 3-5 years. If one or both spouses apply for bankruptcy before being officially divorced, it may be more challenging for the couple to split debts. Unlike Chapter 7 bankruptcy, they won’t get money to cover their debts. They will have to wait longer to settle financial issues and only after that proceed with a divorce.
As you can see, there are many intricate details connected with divorce and bankruptcy that occur simultaneously or one after the other. So, if you want to navigate both processes efficiently, you may need to address a professional lawyer for advice and guidance.