Angela Powell met her husband when they were freshmen in college. They were married after graduation and they settled in Arizona. They consolidated their student loans under a federal program designed to help married couples, which helped lower their interest rates. Unfortunately, like many other marriages, theirs didn’t last.
Even though Angela’s husband had taken out more than double the student loans as her, they were now both on the hook for paying back nearly $200,000 – five times more than what Angela had originally taken out.
This story prompted a bipartisan effort to pass federal legislation to split loans proportionately based on original loan amounts in cases of divorce or domestic abuse. As of this writing, the Bill has yet to pass Congress.
In 41 states, dividing debt is based on “equitable division” or “common law” division, meaning that the court considers a couple’s finances when dividing debt as incurred together. Debt acquired separately is the responsibility of the spouse who added it.
California is one of nine “community property” states, which means any debt incurred during the marriage is divided 50-50. There are additional restrictions and laws involved, of course, to complicate things, such as the possibility of the courts considering assets and debts as total values, but not necessarily each individual item.
Who is Liable for Debt After Separation, but Before the Final Divorce?
With California falling under the community property classification, the time period of incurred debt starts on the wedding date and ends on the date of separation.
This does not cover a spouse’s debts that were taken on before marriage or after separation. Separate property is what each spouse owns or owes individually from before marriage or after separation, plus any gifts or inheritance.
The date of the separation can be defined as the day at least one spouse:
- Takes objective actions that show the intent to separate, which could involve one spouse moving out or starting to sleep on the couch.
- Agrees that the marriage is over.
- Subjectively intends to end the marriage.
Proof of separation needs to be demonstrated by the non-verbal action of the spouses, not just words. For instance, courts will look at if a spouse physically moved out of the shared house, but both spouses still act as a couple together emotionally or socially.
How Credit Card Debt is Handled During Divorce
Again, in community property divorce states, even credit cards that are in one spouse’s name, if the card (and debt on it) was opened during the marriage, each spouse is responsible for 50 percent of the debt.
The same goes for joint or co-signed credit cards – even if one spouse used it more or made the payments. Though it is possible for a judge to analyze the facts and declare that one spouse can afford to pay more than the other towards the reduction of debt. With credit cards held jointly, neither spouse can remove themselves from the account. They can (and should), however, ensure that every joint line of credit or jointly held credit cards are closed to protect each from an ex-spouse transferring balances from their own account onto a joint account or running up the balance, leaving the other spouse liable.
How Mortgage Debt is Handled During Divorce
Even if a home mortgage is in one spouse’s name, in a community property state, like California, the court may consider the home community property during a divorce. A divorce attorney is integral in sorting through the details of each unique case like this.
Keep in mind that there is a difference between the mortgage and the title. The names (or name) listed on the mortgage are those responsible for paying the loan, while the names (or name) on the title are who owns the home.
If an ex-spouse is removed from the mortgage, that same spouse should also be removed from the title. That is because the spouse no longer listed on the title should not then proceed to benefit from any appraisal or sale of the property. And if both spouses are on the mortgage and one does not make payments, the other spouse can be liable, and it could reflect poorly on their credit report.
If both spouses are on the mortgage, the best option is to sell the house, split the profit, and start over in a new chapter in life.
How Auto Loan Debt is Handled During Divorce
Auto loans in both names can get complicated in a divorce, with one ex-spouse keeping the car and making payments – or one not paying and the other getting stuck with payments, any late fees, and default or collection costs. Just like a home, the car’s title and auto loan are separate things, so divorcing spouses need to make sure the ownership is transferred to whoever is keeping the car.
There are options, however, that are fair for both parties to make sure a car loan is paid off after divorce, including:
- Paying off the balance of the loan.
- Refinancing the loan.
- Setting up automatic payments taken from one account, as decided by a divorce court.
- Selling the car and buying something more affordable with a new budget.
How Student Loan Debt is Handled During Divorce
Even with California’s community property law in divorce, there are some debt exceptions incurred during marriage that could be considered separate property, such as gambling debts, civil liability debts from lawsuits involving only one spouse, and student loan debt.
Depending on the specifics of the case, a spouse can argue the 50-50 division rule if the debt is solely for the benefit of one spouse, not for the married couple together. If both spouses have benefited from a student loan debt, for instance, California courts may treat student loans as a community debt or look closer at factors to determine how to split the debt, which includes:
- How much will the debt from the loan affect the amount of monthly spousal support?
- How much has the other spouse already benefited from their partner’s education?
- How much have both parties benefited from the education paid out of community funds?
Pay off Debt Before Finalizing Divorce
The best option to avoid problems with debt after a divorce is to pay off as much debt as possible before finalizing the divorce. This is if you can afford to, of course.
If not, it is advantageous for spouses to maintain an amicable relationship, so they can:
- Split payments (one makes the car payment, and the other pays the mortgage).
- Dissolve joint accounts and refinance the house.
- Cancel shared credit cards and transfer debt onto separate cards under each person’s name.
If you need help with a divorce case, call 619-299-9780 to schedule a free telephone consultation or contact a San Diego family law specialist here.