According to a report by the Federal Reserve released in February this year, the collective debt of Americans surpassed $4 trillion, which is a first perhaps of many. This accumulation of debt is mainly attributed to excessive holiday spending, increasing student loan balances, and a spike in automobile financing at the close of 2018. The Federal Reserve also noted total credit card debt is at an all-time high surpassing $1 trillion and 86 million Americans stand the risk of maxing out their credit card if they make a significant purchase.
Debt is one of the biggest challenges in marriages, and when the union is over, diving debt can bring waves of complication. Debt is prevalent among individuals and couples, and so, it is crucial that you understand how to handle debt accrued during the marriage. Los Angeles Divorce Lawyer has prepared this article to help you navigate this, so you don't shoulder more debt than you deserve.
What Does California Law Say About Debt?
The law stipulates that assets (income, expenses, and debt) gained in the course of a marriage but not after separation are considered community property and therefore subject to equal sharing between partners. Income tax obligations are part of community property. Separate debt, on the other hand, debts incurred before the marital union and after separation are the responsibility of the individual and therefore not subject to deliberation. Thus, the date of marriage and date of separation are vital, so you know precisely when this debt was incurred.
Determining the date of separation is not as straightforward, and the court may have to intervene. According to California law, establishing the day of legal departure is based on the following criteria:
- There must be a physical separation such as one person moving out of the primary residence or when couples have separate sleeping areas such as one person staying into a guest bedroom.
- One party must have a clear intention to sever the marriage, and this requirement goes beyond a trial separation as the couple undergoes counseling.
This law can be voided under exceptional circumstances such as having a prenuptial agreement in place or when the value of debt is higher than the cost of assets. In the latter scenario, the court may order the majority of debt to be assigned to the spouse, who is a much better financial position to clear the debt.
Couples can divide debts and other assets equally, where you share money in the bank and outstanding debts right in the middle. Alternatively, you can sell off properties like the house, cars, and other valuables to clear debt then split whatever remains down the middle. The other option is using debt to even out the division of property earned during the marriage, but this option doesn't always work. For instance, if the car loan is in your name, having your spouse shoulder, the debt does not remove your liability from this loan so if he defaults, this impacts your credit score. The same case happens when you absolve debt in your spouse's name and fail to honor that obligation.
How Can I Prepare for a Division of Debt in a Divorce?
Before we get into the specific types of debt you will be deliberating upon, it is vital you understand what
- Gather relevant documents
The best starting point is getting all the paperwork together by getting updated statements on mortgage loans, car payments, credit card debts, student debts, bank loans, medical bills, etc. so you understand how much debt you have accumulated thus far. Gather the most updated income statements, profit and loss statements for your business enterprise, etc. and measure your total earnings against total debt to see where things stand.
Community property laws do not cover gifts and inheritances so you can exclude these if applicable. However, if ownership is unclear or both spouses have valid co-ownership, then these gifts and bequests fall under public property.
Getting a clear picture of income versus debt for both spouses helps in arriving at an equitable allocation of outstanding debts, and this does not necessarily mean dividing equally. Even if California is a community property state, the judge will consider factors such as earning power, child support, health, age, level of education, and so on when determining how to distribute debt.
What's more, California is a no-fault state in divorce so the court cannot punish one spouse by letting them absolve more than a fair share of the debt. Economic justice is the primary concern when discussing matters of liability.
- Classify your debts
Once you have the necessary documentation, categorize debt into three broad categories; secured, unsecured, and tax-related liability. Each classification has legal implications and therefore, must be handled with a keen eye and grasp of California laws to avoid making costly mistakes.
- Secured debts – these are loans with assigned collateral such as the primary residence or other property. Real estate mortgages and chattel loans on cars and boats are the most common types of secured debts.
- Unsecured debts – these liabilities are not associated with any property such as medical fees, credit lines with your bank, and credit cards.
- Tax debts – this category can either be owed to the federal or state government and if you filed joint tax returns, you are both liable for the whole debt.
Apart from the liabilities you already owe, the process of separation and divorce is yet another avenue where you accrue more debt. New debt could be from renting another house, legal bills, property appraisals, court-ordered mediation, moving out, car lease, etc. Factor in all these debts as one or both of you will eventually be liable.
- Marital debts versus separate debts
Once you understand how much debt you incurred in this union, the next logical step is determining which liability was obtained inside the marriage and which one is separate. As explained above, any debts acquired in the duration of marriage through joint ownership such as a mortgage loan, credit card, or business loan is marital debt. Other liabilities that are in one person's name, such as medical bills, student loans, or even credit cards are generally considered as a separate debt. Singular debt includes bank accounts that you opened before getting married.
- Seek counsel from a qualified divorce lawyer
The next phase of preparation is enlisting an experienced divorce attorney to examine your case and give you expert advice so you don't agree to debts that could cripple you. Whether you are filing or non-filing spouse, do not assume things will run smoothly, and your partner will remain civil. Money is a thorny issue even for the best marital unions, and going through a divorce is not any different. Los Angeles Divorce Lawyer has a wealth of experience with clients seeking divorce amid mounting debts that trigger heated disputes. We shall review your income and debt statements and determine the best way to protect your interests now and after the decree is issued.
What are the Various Debts Considered in Divorce Proceedings?
When considering debt, there are four debt categories to think about as discussed below:
- Credit Card Debt
You are only liable for credit card debt when the card is in your name, but this must be based on agreement on how you wish to split the payments. However, if you have a joint credit card, this debt falls squarely within community property irrespective of whose name is registered on the account. Therefore, even if the breadwinner was making these payments, both parties are liable for this debt.
- Mortgage Debt
Once the divorce judgment is granted, you can no longer live in the same house, so divorce experts highly recommend offloading the primary residence and splitting the proceeds. If your home is the most valuable asset you have, such a move can help clear outstanding debts, so you start your new life free of this burden. If you choose this solution, determine how much mortgage you need to pay while your home is listed awaiting a profitable sale. The other option is one spouse buying the other out, so they have sole ownership of the house and then refinance the mortgage, so subsequent payments are under their name only.
Reimbursements of mortgage payments
Home ownership may also be complicated where one spouse owned the home before the union, and then their partner contributed toward the mortgage payments during the marriage. The other spouse may also have invested in the home through remodeling, thus giving them some interest in the house, so they deserve a repayment of whatever amount they spent on upgrading the home.
One party may have used funds from a separate property – obtained before marriage – to pay the mortgage during the marriage. In this scenario, a judge may rule the contributing party is owed a reimbursement by of this investment in part or the full amount provided these claims are valid.
Reimbursements can also occur when the court rules one spouse should continue paying mortgage instalments using separate property – income earned after separation – even when they no longer live in the home. This person is entitled to a repayment otherwise known as Epstein credits.
Non-reimbursements of mortgage payments
As seen above, California courts are keen to help spouses recoup their mortgage investment made after the separation officially began and before a disillusionment of marriage is granted. However, these repayments are not viable under the following scenarios:
- The spouses have waived the right to recompense for payments made during marriage and separation (if any)
- If a judge rules, it would be unreasonable and unjust for the spouse to get repayments, for instance, if they make so much more money than their partner.
- The contributing spouse still lives in the home, and the instalments were not considerably higher than the rental value of the property
- Mortgage payments were gifted to the other spouse for instance, if the contributing spouse had pledged to buy the home as a gift to their partner
- If mortgage payments were made as a kind of spousal support or to counter alimony
What are Watts Charges?
The spouse who remains in the primary residence during separation and divorce proceedings may be asked to pay "Watts charges," which are mostly the rental value equivalent of the home in this timeframe. Therefore, the contributing spouse is entitled to Epstein charges as explained above while the spouse with exclusive use and ownership of the house will pay "Watts charges." The spouse who lives in residence will owe their former partner half of this rental value for the duration of separation and divorce.
Handling the family home and mortgage payments are arguably the most significant issue in divorce proceedings, and things can get murky as warring spouses attempt to take advantage of the other. Los Angeles Divorce Attorney is adept at handling divorce cases, and we can give you the best advice for your circumstances.
- Auto Loan Debt
To reiterate, California is a communal property state which means all debts incurred during the marriage are the liability of both spouses irrespective of who signed for said debt. When it comes to auto loans, you are only liable for the cars you purchased when married and not any car loan your partner brought to the marriage.
Negotiations are allowed, and spouses can decide who takes up car payments and how they are compensated if need be. For instance, the spouse who is the breadwinner can continue paying these instalments instead of other expenses such as child support or spousal support. These set-off arrangements must be made with careful consideration as defaulting on payment will hurt your credit score if the car is registered under your name. If you will make payments while not driving the vehicle, have your name removed from the title, so you are not responsible for the car after divorce is granted.
When debt negotiations hit a snag in a community property state, the next best option is selling the property – in this case, the family vehicle – then share the proceedings after clearing outstanding debts. Whichever option you choose, the judge must approve these arrangements or else the California debt division regulations will apply.
- Student loans
Most people enter into marriages with student loans from their college years, and they may rack up some more debt in the course of the union. Any student loans obtained after the date of marriage are considered community property and therefore will be subject to equitable allotment during proceedings. If you combined all student debts with news ones acquired inside marriage, then you are both liable for the cumulative amount since the date of consolidation. This approach means if you only just combined student loans three years ago and yet you applied for them over ten years ago, you are still liable for the consolidated debt.
A prenuptial agreement may stipulate how such matters should be handled in case of divorce. Nonetheless, if the judge deems this accord invalid for some reason, your best recourse is negotiating agreeable terms with the help of family law attorneys to avoid protracted court battles.
- Medical Debt
The ongoing debate on health insurance coverage becomes ever so crucial in divorces where children are involved as minding their health matters is central to their well being. Under California law, both spouses are responsible for 50 per cent of medical bills and dental costs for their children.
When it comes to medical bills, the nine states that uphold community property laws stipulate each spouse is liable for 50 per cent of these expenses, even if they were incurred by one person. The same rules apply; if medical bills were born before the union or after the date of separation by one or both spouses, this is considered separate debt.
Determining who pays subsequent medical bills is based on necessary care versus cosmetic interventions. "Necessary care" means medical procedures that children or the ex-spouse may need to live such as open heart surgery whereas cosmetic procedures are not for sustaining life such as a facelift. The court will be inclined to pursue the best interest of children when determining which parent pays medical expenses. There are particular considerations such as income levels of the custodial and non-custodial parents, and which parent will pay child support and how much per month. Finding the best financial situation for the child is the foremost priority, so divorce agreements must reflect as such. If you are worried about your children's health insurance is at risk, Los Angeles Divorce Lawyer will ensure this matter is handled correctly.
In sum, receiving the Judgment of Dissolution of Marriage is not the end; some ex-partners may fail to honor the court's decree on financial arrangements like spousal support, health care, or mortgage feigning financial woes. If this happens to you, we shall investigate on your behalf and ensure they are held accountable, so your family is protected after the marriage is over.
Find the Best Divorce Lawyer Near Me
Getting a divorce is not an easy process, and the money aspect usually complicates things making the process more painful than anticipated. When preparing for this life-altering journey, you need a clear picture of the family's debts, including those acquired before marriage, during the marital union, and after the separation date. Accurate record keeping goes a long way in smoothing things over, so the divorce settlement is fair to both parties after all things are considered. Contact the Los Angeles Divorce Attorney at 310-695-5212 so we can examine your case and determine the best strategy of dividing debts.