It is easy to focus on how to divide assets at divorce, but what happens to debts? The allocation of debts in a divorce can greatly affect the overall division of the community estate.
DIVISION OF DEBTS BY THE COURT
Pursuant to California Family Code section 2550, at divorce, the court tries to allocate community debt (debt incurred during the marriage) so that there is a net equal division of the community estate. In other words, each spouse should ideally receive an equal value of the estate when the assets minus the debts awarded to each are considered.
However, there are exceptions to this “net equal division rule” as discussed below:
According to California Family Code section 2621, if you incurred a debt before marriage, you will be confirmed that debt at divorce.
The “date of separation” is defined by Family Code section 70 as the date that a “complete and final break in the marital relationship has occurred, as evidenced by both of the following: (1) The spouse has expressed to the other spouse his or her intent to end the marriage. (2) The conduct of the spouse is consistent with his or her intent to end the marriage.”
If you incur a debt post-separation, you may be confirmed that debt depending on whether it was incurred for the “common necessaries of life.” (See discussion below for more information about what qualifies as necessaries of life.) If you incurred the debt for such necessaries, the court will generally confirm it to you and/or your spouse according to your respective needs and abilities to pay (at the time the debt was incurred). (Family Code § 2623(a).) On the other hand, if you incurred the debt for “non-necessaries,” the court will generally confirm it solely to you. (Family Code § 2623(b).)
If you incur a debt after your divorce or legal separation judgment, you will be responsible for that debt pursuant to California Family Code section 2624.
According to California Family Code section 2625, if you incurred a debt during marriage and before separation that was not “incurred for the benefit of the community,” you will be responsible for that debt. For example, in the case of Marriage of Bell (1996) 49 Cal.App.4th 300, the court ordered Wife to be responsible for the attorney fees related to her defense in civil and criminal actions brought against her as a result of her embezzlement activities, of which Husband was unaware.
What if Debts Exceed Assets?
If your community debt exceeds your community assets, the court has the power to assign the debt to you and your spouse as it believes is just and equitable. How does the court decide what is “just and equitable”? It considers each case based on the unique facts at hand, including the spouses’ ability to pay, their ability to negotiate with creditors, their respective business backgrounds, and their ability to liquidate other assets to discharge debts. (Family Code § 2622.)
Generally, even if a school loan was taken out during marriage, the court will assign this debt to the spouse who obtained the education. There is an exception if the court finds that such an assignment would be unjust because the community substantially benefited from the education or the supported spouse who obtained the education thereby lowered his or her need for spousal support. (Family Code §§ 2627, 2641(b)(2) & (c).
If your spouse committed a tort (wrongdoing resulting in civil liability) such as sexual harassment, and that tort was “not for the benefit of the community,” associated monetary damages will be assigned to the offending spouse. (Family Code § 2627.)
In general, if your spouse was assigned a debt in your divorce or legal separation judgment, creditors cannot come after you for repayment. (Family Code § 916) There are exceptions to this general rule. For example, a creditor may still have a set-aside remedy pursuant to the Uniform Voidable Transactions Act. The following examples pertain to cases where the debts have not been assigned pursuant to a divorce or legal separation judgment.
Liability of Community Property
In general, community property is liable for all debts incurred by either spouse before or during the marriage. In fact, according to Family Code section 910, the community property estate is liable for all debts incurred by either spouse before or during marriage and before separation, including child and spousal support obligations from prior marriages and debts that were not incurred for the couples’ mutual benefit. For example, in the case of In re McIntyre (9th Circ. 2000) 222.F.3d 655, 658) the entire community property estate, including the non-debtor spouse’s share of the community property estate was subject to the IRS’ levy in regards to the debtor spouse’s income tax debt.
However, the community may be entitled to reimbursement. For example, if Wife uses community property to pay a child or spousal support obligation from a prior marriage even though she could have used her separate property income to do so, Husband can seek reimbursement at divorce (in regards to his one-half share of the community). (Family Code § 915(b).)
Additionally, there are exceptions to community estate liability. For example, if Husband incurred a student loan debt before marriage, Wife’s earnings during marriage would not be liable for his pre-marriage debt. (Family Code § 911(a).) In this context, “earnings” are compensation for personal services performed, as an employee or otherwise. (Family Code § 911(b)(2).) Income received from passive investments, gifts, and otherwise is not shielded from liability by Family Code section 911. Further, to shield earnings, Wife would need to keep them in a separate deposit account from which Husband could not withdraw. In practice, this is rare, and both spouses’ paychecks, or at least a portion of their paychecks, are deposited (or “commingled”) into a joint account.
Liability of Separate Property
Each spouse’s separate property is liable for his or her own debts incurred before or during marriage. In general, a debtor spouse’s separate property is not liable for the other spouse’s debts, regardless of when those debts were incurred. (Family Code § 913(b)(1).)
Necessaries of life exception
However, your separate property may be liable for debt incurred by your spouse during the marriage if that debt was for the “necessaries of life.” What are the “necessaries” of life? Some common examples include food, housing, and necessary medical expenses. However, be aware that “necessaries” may include more, depending on your individual circumstances. For example, in the case of Direct Capital Corp. v. Brooks (2017) 14 Cal. 5th 1168, 1172-1177, a creditor who provided business equipment to Husband during the marriage was allowed to reach Wife’s separate property under Family Code section 914 because the leased equipment was reasonably necessary to run Husband’s business and ability to earn a living.
Note: This exception only applies if the debt for “necessaries of life” was incurred while you and your spouse were separated pursuant to an agreement that contained terms covering support obligations. (Family Code §§ 914(a)(2), 4302.)
Separate property reimbursement right
If your separate property was used to pay your spouse’s debt at a time when community property or your spouse’s separate property was available, you may be entitled to reimbursement to the extent such community property or separate property was available but not used. (Family Code § 914(b).)
As illustrated above, the division of debts at divorce is a complex process. A skilled family law attorney can evaluate your individual case and advise as to how your and your spouse’s community and separate debts should be allocated.