Clients often ask how to handle marital debts after the parties have separated, but before the parties come to a final allocation of assets and debts. One common dispute is how to assign liability to debts incurred during the marriage. One spouse may claim a debt is not theirs because they are not listed as debtor to the loan institution, or the loan is secured by the other spouse’s separate property. It’s important to be clear as to whether the marital community is liable for a debt in order to avoid foreclosure, lawsuits be creditors, or large reimbursement claims once the parties finalize their divorce.
Generally, both spouses will be liable for a debt incurred by either spouse during the marriage and before separation. This rule will still apply even if only one spouse is listed as the “debtor spouse” to the lending institution. In fact, the “non-debtor spouse” (or the spouse that is not listed on the debt or loan) will still be on the hook for paying down this debt or loan should the creditor come after only the debtor spouse. The non-debtor spouse may be liable without even being listed as a party to a collection action by the creditor. Under California Family Code section 910, the creditor on a marital debt does not need to list both spouses in the action in order to collect from the community assets. Fortunately, a creditor will not be able to go after the non-debtor’s separate property assets or funds to pay down the marital debts.
If a creditor does file a collection claim against the debtor spouse, it is important the non-debtor spouse be joined as a party to argue any potential defense to community liability for the debt. This allows the non-debtor spouse an opportunity to be heard as to his or her personal liability. If the non-debtor spouse chooses to not be heard, then any decisions that are made regarding the community’s obligation will be binding upon both parties. The spouse that didn’t appear will be barred from later contesting these determinations of liability.
A spouse may insist on not paying down a debt after separation because they believe the debt is not theirs to pay. This means the parties or the court must figure out the “characterization” of the loan or debt if it’s unclear on its face. For example, say Husband took out a loan during the marriage that was secured by his own separate property. Upon divorce, Wife might want to insist that this loan is Husband’s separate obligation, since if he defaults on it, it is his separate property that will be seized by the creditor. At first glance, this seems to make sense. However, a court may still find the loan to be a community obligation, meaning both spouses are liable for repayment, if it is found that the loan had nothing to do with the secured separate property. For example, if a mortgage is taken out to acquire a new separate property home for one of the parties, that mortgage will probably be assigned to that party only, because it benefits that party only. However, if a loan or debt is merely secured by separate property (not used to acquire it), the loan will probably not be characterized along with the property obtained. This is because the loan may have benefited both parties jointly and, for example, helping the parties pay other debts, go on vacations together, etc. It would be unfair to associate that loan only with the property securing it when it clearly was used to benefit the marital community.
Often one spouse will just stop making payments on a debt until they get confirmation that the debt is their responsibility, too. If it turns out that debt was the liability of the community, then the spouse who continued to make payments after separation can seek a reimbursement for the other spouse’s one-half obligation they failed to pay. If you are unsure of what debt obligations you owe or should continue paying, contact an attorney at Cage & Miles, LLP to set up a free 30-minute consultation today.