The California Family Code is clear.
Marital property must be equally divided.
Judges are required to make an equal division. And community debt must be part of this division.
But what is community debt?
This is debt incurred during your marriage but before separation for the benefit of the community.
So it seems like property division is pretty straight forward.
Community assets minus community debt divided by two determines the amount of assets each spouse is entitled to.
And If the debts exceed the value of community property and quasi-community property the court can assign the debts in a manner they deem to be equitable taking into considerations each spouses ability to pay.
This is an oversimplification.
But, because real life is never so simple it’s best to start with a clear workable concept and then deal with complexity as it arises.
The first complexity…
Creditors Can Ignore A Divorce Decree.
When two people sign a credit application, the credit card company is very happy. They’ll be able to collect this debt from two people. They can attach two people’s paychecks. They can file lien’s agains two people’s property. This is valuable and they very are reluctant to give this up.
And one more thing.
The creditor is not a party to the marital settlement agreement so they aren’t bound by it. Even if the court assigns the debt to one spouse it won’t stop creditor from pursuing the other spouse.
What this means to you.
You go to trial. The judge assigns the credit card debt to your ex. The court has ordered that they must pay. But what if they don’t. The account will go into default and the creditor will seek 100% of the debt from you.
You can object. Send the creditor the family court order. And they’ll send you the credit application with your signature and demand 100% of the debt from you.
You’re stuck with it.
Or if you didn’t sign anything, they may demonstrate that the debt was incurred during the marriage for the benefit of the community. Therefore, it is community debt debt and you’re responsible for it.
There is an answer.
You may have the right under the family court to pursue your ex for the money. Or your marital settlement agreement may have an indemnification clause that gives you a clear right to pursue your ex.
But, this solution has a problem.
You’ll have to go back to court. You’ll spend time and money and you may not receive the relief you expected, which is probably cash right now.
A simpler method is…
Debt Consolidation and Divorce
In the process of completing court required Schedule of Assets and Debts and the Income and Expense Declaration you’ll have the opportunity to see into both your financial future.
You will know if there will be income to cover living expenses and service debt.
If you are using software to complete California Judicial Council Forms you’ll be able to see your numbers translated into charts and graphs. Making the numbers visual can be crucial to making an informed decision.
If it’s clear there is not going to be enough money or barely enough money to maintain your standard of living, now is the time to make short term life style adjustments.
Maybe sell the car with the high monthly payment. Terminate the too expensive auto lease. Is there an early termination penalty? Better check.
Paying a lump sum to release yourself from a recurring expense that creates the risk of late or missed payments is the reasonable thing to do.
Defusing this stress and avoiding the damage to your credit score, which can be very expensive for a long time, is a gift worth giving to yourself.
If paying off your debts is not possible then you may want to…
Transfer Your Debt
After you are separated.
Each spouse could open a new credit card in their own name, not a joint account. And then transfer the agreed upon amount of debt to the new card.
And then close the joint accounts.
Each spouse will be responsible for paying off their new card
This is a good time to use a credit monitoring service to make sure there are no missed payments or outstanding accounts.
Please be aware, as your divide your community debts, that a court can assign debts incurred by one spouse for the necessaries of life after separation to the other spouse.
Your Mortgage Is More Complex.
If your house has equity it can be sold and the equity used to pay down community debt.
There is a lot to be said for making a clean break with the past. Not having to worry that your ex won’t make payments on their share of the credit card is a tremendous relief. Especially if you are relying on child support.
But, sometimes selling the house isn’t possible.
Maybe it provides access to a school district or to your kid’s friends and needed emotional stability during a difficult time.
Also an emotional attachment to the house can be overwhelming. Often the house is a symbol of a life well lived and the keeper of all your best memories.
In that case, one option is refinancing the home and executing a quit claim deed.
Refinancing allows the exiting spouse to receive their share of the home equity and clear the mortgage debt from their credit. The quit claim deed gives the remaining spouse clear title to the house.
If your mortgage is underwater refinancing can be difficult if not impossible.
I’ve attached a guide from the Federal Reserve that should help clarify the refinancing process. A Consumer’s Guide to Mortgage Refinancing
A word of caution,
Executing a quitclaim deed without refinancing creates a big problem.
The quit claim deed extinguishes all of your rights to the house. You are not on the title. You have no rights to it. It is gone, except your name is still on the mortgage. You are still obligated to pay the bank.
This means, you have to pay for a home that you will never own.
Using Retirement Accounts to Pay Off Debt
There are at least two problems with using money from a retirement account to pay off community debt.
You will need that money later, when you are older.
And money withdrawn from a pretax account like an IRA or 401(k) generates a tax bill.
Remember, this income was deposited into the 401(k) or IRA before taxes were paid. And now, when the money is withdrawn, the tax is due. Depending on your tax bracket, it is not unheard of for a $10,000 withdrawal to become $6,600.
Debt and divorce is a complex problem but not unsolvable.
The key to creating your solution is having a conversation, or series of conversations, to form a plan.
One part of that plan may be learning more about personal finance. I’ve attached a link to US News and World Reports “10 Best Personal Finance Courses.”
The information provided in this post is for general information purposes only and should not be construed as legal advice. You should not act or rely upon this information without seeking formal professional counsel. The information provided in this post is not intended to create an attorney-client relationship.