How Is Debt Split in a Divorce in California?
California has definitive laws to address what happens to debt when divorce occurs before, during and after money is spent and loans are incurred. One of the most hotly disputed issues in divorce court is who gets the assets--all those things that the two of you worked so hard over the years to acquire--and who is obligated to pay for them if you get divorced.
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Definition of Marriage
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California refers to the marriage (and to the husband and wife) as the "community" in its legislation when referring to assets and debts.
Premarital Debt
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It is not unusual for people to enter into marriage with at least some debt. If joint funds are used to pay down that debt after the wedding, then according to California law, the "community" or the marital union has a right to reimbursement in a divorce settlement.
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Premarital Assets
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In another scenario, one party may have used assets she built up before the marriage (which would generally be exempt from distribution in the event of divorce) to pay off a debt that was incurred during the marriage. Does she get her money back when they divorce? No. California considers this a gift made to the couple's marital community. This is not the same as if a spouse uses premarital property to either invest in or buy community property. If she keeps a "tracing" of the money (bank records showing that the funds went from a premarital asset into a marital asset) then she would be entitled to reimbursement from the community unless this right was specifically waived in writing.
Marital Debt
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Section 910 of California's Family Code says that if a debt was entered into during the marriage, it belongs to the community regardless of whether it's in your name or your spouse's name.
Post-Separation
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Any post-separation debt incurred has to be qualified. Was it run up for the necessary support of one of the spouses or any children involved? Is there a child support or alimony order in effect? If there's not, then this debt can be assigned or charged to either spouse, but in all likelihood the courts will land responsibility for payment of this loan to the spouse who will end up paying support. If one spouse has use of an asset (a car or the home) after separation while the other spouse makes the payments on it, the paying spouse can seek reimbursement from the community for the payments.
Epstein Credits
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In 1979, the California Supreme Court heard a complicated case now known as "In the Marriage of Epstein." It resulted in several qualifications to the existing statutes that are collectively dubbed "Epstein credits." For instance, if a spouse voluntarily decides to use her current earnings to pay down a marital debt of the community after separation but before divorce, she's entitled to reimbursement from the community.
Warnings
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Many experts advise that when at all possible, debts be eliminated at the time of divorce. According to Aaron Dishon, an attorney with offices in Irvine, California, as long as they exist, no matter what your divorce judgment says, creditors have the right to go after you and your ex-spouse for repayment.
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References
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