Shocking News Flash: A breakdown of one’s marriage and debt usually go hand in hand. Money issues can lead to separation and separation between married people can lead to substantial debt issues. Debt does not go away when a couple separates; it merely sits in wait, ready to pounce as the next woe to be addressed.

In the context of domestic relations (divorce/legal separation), debt generally is categorized in one of two classifications: Community Debt or Separate Debt. The timing of the debt (whether it’s during the marriage or before/after) and the purpose of the debt, (benefit to one spouse or the community (both spouses)), will determine the classification and, in turn, who is ultimately
financially responsible for the debt. In this first blog, we will focus on the debt incurred to the benefit of the community.

California law assumes that all debt incurred during the marriage is community in nature. This assumption is rebutted if debt, even debt incurred between the parties’ date of marriage and date of separation, provided a unilateral benefit to one of the parties in such a way that it would be unconscionable to hold the other party responsible. An example of this would be if the Husband, during the marriage, took out a loan and sent the loan proceeds to his sister for his nephew’s medical needs. Unless the Wife agreed that the monies sent to her sister-in-law were a gift from the Husband and Wife, the Husband’s loan obligation would be deemed Husband’s separate debt.

Once it is established that a debt is “community” in nature, there is a presumption that each party is responsible for an equal share of that debt (50% each). This presumption exists for all such community debt, whether in both parties’ names or solely in the name of one spouse. The parties have a right to negotiate their respective financial responsibilities so that a spouse
would take on sole financial responsibility for a certain debt in exchange for something else (e.g. additional share(s) of a community asset).

However, a common pitfall of divorcing parties, especially those who are not represented by an attorney, is that a divorce order holding their spouse solely financially responsible for a debt will stop creditors from harassing and/or attempting to collect from them. This is NOT the case; the Family Court does not have the authority to cease liability to third-party creditors or require a creditor to remove a party’s name from the debt obligation. Generally, if debt exists, the creditor will go after all persons on the account to attempt to collect on the obligation. But all is not lost. What the Family Court can order is that the court-ordered, financially responsible party to indemnify the other party for all monies collected/other costs incurred (e.g. attorney fees).

Another issue that regularly comes across my desk is the situation where a recently divorced person has received notice that their ex-spouse has filed for bankruptcy protection to wipe out debt that was assigned to them in the divorce. Example: A couple has $80,000 in joint credit card debt. The Family Court orders each party to be responsible for $40,000 of the debt in the Divorce Judgment. The Husband, (now Ex-Husband), files for Chapter 7 bankruptcy relief to wipe out his liability for the debt and receives the corresponding Discharge order. The Wife, (now Ex-Wife), is left with $80,000 debt in her name alone. The creditors switch their attention completely to the Wife to try to collect on said debt. The silver lining in this scenario? While the Husband’s personal liability to the creditors may be extinguished, his obligation to indemnify/reimburse the Wife for any monies collected by the creditor(s) from her on Husband’s share survives the bankruptcy discharge.

As issues of debt in domestic relations actions can be complex. It is always advisable to consult a family law attorney before proceeding with a divorce, legal separation, and/or bankruptcy filing.

The Law Offices of Ian S. Topf, APC offers a free consultation in a variety of issues, ranging from family law, bankruptcy, debt collection defense, estate planning, criminal defense, DUIs, and general civil matters.