How to Deal With Debt in a California Divorce

Financial experts are divided on whether there’s any such thing as “good debt” for your credit score and financial future. However, experts and laypeople alike agree that some kinds of debt are worse than others. For many people, there’s one kind of debt that’s more painful to pay than any other: the one you didn’t take on voluntarily. 

Usually, you cannot be forced to pay for someone else’s debts without specifically agreeing to take responsibility for them. However, marriage and divorce can obligate you to cover some of your spouse’s debts, even if you weren’t aware they existed. 

There are strategies to avoid this responsibility, though. Let’s explore California’s laws regarding the division of debts in divorce and strategies for handling debt in your divorce to protect your independent financial future. 

Understanding Community Property Laws

California is a community property state, which means that any debt accumulated during the marriage is generally considered the responsibility of both parties. This includes credit card debts, mortgages, car loans, and even some personal loans. They are subject to the same 50/50 split as the division of assets, regardless of whose name is on the account. However, several forms of debt are not considered joint property, such as:

• Those Incurred Before Marriage and After Separation: Debts that either spouse incurred before getting married or after getting separated are typically considered separate property. Each spouse is solely responsible for any debt they brought into the marriage or accrued after the official date of separation.
• Those From Separate Property: If a loan was incurred to acquire, maintain, or improve separate property (property owned by only one spouse), it may be considered a separate debt.
• Those Excluded by a Prenuptial or Postnuptial Agreement: Couples may agree, either before or after getting married, on how they will treat their debts in the event of a divorce. This can include agreements that certain obligations will remain the responsibility of one spouse.
• Those Tied to Non-Marital Misconduct: In rare cases, if a loan was incurred due to the financial misconduct of one spouse (such as gambling losses or expenses from an extramarital affair that impacted marital finances), a court may rule that such debts are the separate responsibility of the spouse who incurred them.
• Education Loans: Generally, student loans incurred during the marriage are considered the separate debt of the spouse who took them out, especially if the education benefits primarily that spouse.

While these are considered separate debts and not eligible for asset division, creditors may still pursue both spouses for bills incurred during the marriage, regardless of how a family court divides them in a divorce. If you’re preparing for a divorce, it’s important to work with legal and financial professionals to understand your rights and obligations and to ensure that the division is addressed effectively in your divorce proceedings.

5 Steps for Dealing With Debt in Divorce

There are plenty of techniques for handling bills, loans, mortgages, and other financial obligations in a California divorce. Let’s break down the process into five general steps:

1. Identify and Categorize Debts

Compile a comprehensive list of all debts, including credit card debts, loans, mortgages, and any other financial obligations. Determine which debts are community and which are separate. The individual bills will remain with the person who accrued them, while the marital debts must be divided along with the assets. 

2. Negotiate Debt Responsibility

Although the default is a 50/50 split, you can negotiate a different ratio during the division of assets. For example, if one spouse keeps the family home, they might also take on the mortgage debt, regardless of how other assets are split. Some of the most common strategies for assigning debts in divorce include:

• Equitable Division of Debts: Each party takes on a portion of the debts that is fair, though not necessarily equal. This approach considers each spouse’s ability to pay, their income, and their post-divorce financial needs.
• Assumption by One Party: One spouse agrees to take on more (or all) of the marital debts, often in exchange for a more significant share of the marital assets. This approach might be practical if one spouse has a higher income or better ability to manage debt.
• Selling Assets to Pay Off Loans: Selling shared assets (like the family home, cars, or investments) and using the proceeds to pay off joint obligations. This strategy can be a clean way to eliminate debt and simplify the division of assets.
• Bankruptcy: In some cases, if the debt is overwhelming and neither party can realistically pay it off, filing for bankruptcy might be an option. This should be considered carefully, as it has long-term financial implications.

Ensure that any agreement on debt division is legally documented, preferably as part of the divorce decree.

3. Refinancing and Consolidating Debts

If possible, refinance joint loans so that they are in the name of the person who will be responsible for them post-divorce. This will simplify payments and potentially lower interest rates. The process might involve transferring credit card balances, refinancing a mortgage in one party’s name, or consolidating multiple accounts into a single loan.

4. Credit Protection

Protect your credit score by ensuring that all shared debts are accounted for and managed. Close joint accounts and monitor your credit report regularly during and after the divorce process.

5. Seek Professional Advice:

Consulting with a financial advisor and your divorce attorney can provide personalized strategies based on your unique situation. They can help navigate complex issues like tax implications and long-term economic impacts.

Experienced Legal Counsel for California Divorces

Dealing with debt in a California divorce requires a clear understanding of community property laws and a strategic approach to dividing liabilities. By identifying and categorizing your obligations, negotiating responsibility, refinancing when possible, protecting your credit, and seeking professional advice, you can navigate this complex process more effectively. At Kaspar & Lugay LLP, our experienced divorce attorneys can help you handle any debts in your divorce without jeopardizing your financial future. Get in touch to discuss your situation and learn how we can assist you with asset and debt division in your California divorce.