In a community property state such as California, spouses are considered to have an equal right to the assets that have been accumulated during their marriage. Similarly, they also have an equal responsibility for any debts that have been incurred in that time. If a couple divorces, the first thought each party often has regarding property division is on how to ensure they receive their fair share of marital assets. However, how their joint debts are divided or settled may have as much, if not more, significance for their long-term financial well-being.
To make informed decisions about how to handle shared loans such as mortgages, credit card debts, or car loans when divorcing, the first thing to determine is which debts are considered the responsibility of both parties. More important, though, is understanding the risks inherent in joint loan property division after divorce. Creditors can retain the right to go after you for payment of a shared debt even if your property division agreement specifies that your ex-spouse is responsible for paying it if your name is still on the loan or credit agreement.
Consulting an experienced family law attorney can help ensure not only that you are fully informed of your legal responsibilities but also that you do not end up taking on an unequal share of debt or unanticipated risks.
- Marital Debt vs. Separate Debt in California
- Financial Liability for Joint Debt
- Property Division and Mortgages
- The Risk of Retaining Joint Loans After Divorce
- Frequently Asked Questions
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Marital Debt vs. Separate Debt in California
Not all the debt that a couple holds when they divorce is automatically considered shared debt. Just as a spouse can enter a marriage with separate property (assets they had accumulated prior to getting married), they may have taken on debt before they got married, like student loans or a car loan, that are considered theirs alone. Debts that are incurred by either party after the date of separation—the day that one spouse informed the other by words or actions that they wanted to end the marriage—are also considered separate.
Many of the largest debts to be considered in a divorce are likely to have been taken on with the full knowledge and participation of both parties, such as a mortgage. In California, though, even debts taken on by one party alone during the marriage are typically considered joint debt, with some exceptions. Joint loan property division rules can influence how these debts are allocated. According to Family Code § 2625, if the court finds that a debt taken on by one spouse during the marriage was not for the benefit of the community, it may decide that debt is separate rather than marital.
Student loans taken on during marriage are considered a special case; while these are generally not “included among the liabilities of the community” by law, the circumstances surrounding the loan may affect whether the other spouse should be responsible for any part of that debt. An experienced family law attorney can help provide insight on what debt might be considered separate and effectively advocate for that position in court.
Financial Liability for Joint Debt
The key difficulty with handling joint debt after divorce lies in the fact that a creditor is not bound by the terms of the property agreement you make with your ex-spouse. If you have co-signed for a loan or are a joint account holder, they can still hold you responsible for the debt regardless of what the court has ordered. For example, if the court determines that your ex should handle the balance on a shared credit card after your divorce and they simply stop paying, the company can still come after you for payment. While you can go back to court to try to hold your ex to the terms of your agreement, this won’t stop creditors from pursuing you or prevent damage to your credit record.
This is why it is usually wisest to try to eliminate any joint liabilities as you divide your property. The simplest and best way can be to pay off any loans before the divorce is finalized, such as by using savings to pay off a joint credit card balance and then closing the account. If it is not possible to fully discharge a debt, then the next-best option is to refinance the loan so that it is only in the name of the spouse who is responsible for it, removing the joint liability.
Property Division and Mortgages
A home mortgage may be the biggest liability a divorcing couple has, and what happens to it depends entirely on what option they choose regarding the home itself and/or the loan. The first possibility is to sell the home as part of the divorce. Proceeds from the sale can be used to pay off the existing mortgage and eliminate the joint debt associated with it, with any profit remaining from the sale distributed according to the property division agreement. This strategy also allows the couple to take advantage of the full capital gains tax exemption on the home’s appreciation while they are still legally married.
If the couple agrees that one spouse will keep the home, the cleanest option is to refinance the mortgage in the name of that spouse only and re-title the house in their name. In most cases, a mortgage company will not allow one co-borrower to simply assume (that is, take over) the existing loan, so the spouse who wishes to keep the house will need to qualify for a new loan on their own. They will also need to consider how to compensate the other spouse for his/her share of any home equity, either by giving them a greater share of other marital assets or by taking a cash-out refinance that allows them to give their spouse their share in cash. This strategy releases the spouse who is not keeping the home from any future mortgage liability for the property.
The last, and riskiest, option is to keep the existing mortgage, with the divorce agreement specifying who is responsible for making the payments. Perhaps the spouse who wishes to stay in the home would not be able to qualify for a new loan based on their current income and credit score, but keeping the existing loan will let the couple’s children have the stability of staying in the family home with them. Regardless of the reason, the mortgage lender will consider both parties equally responsible for making payments as long as both their names are on the loan, no matter what the divorce agreement says. If you are unsure whether the other spouse can be trusted to make consistent, timely payments, this approach is probably not advisable.
The Risk of Retaining Joint Loans After Divorce
When your name remains on a joint loan after divorce, you run the risk of being held responsible for debts that your ex should be paying. The negative impact of late or missed payments on your credit score can affect your ability to borrow in the future, and you could find yourself being harassed by creditors who are legally entitled to collect payment from you.
If it is not possible to eliminate all such debts during property division, you should carefully monitor them to ensure that payments are being made on time and according to your divorce agreement. If they are not, it may be in your best interest to pay the debt to protect your credit and then take your ex to court to be reimbursed. In addition, monitoring your credit report can help alert you if your ex’s actions (or inaction) are starting to have an adverse effect.
Expert Legal Guidance for Property and Debt Division in Silicon Valley
How property and debts are divided in divorce can have unanticipated consequences for your ongoing financial stability. The knowledgeable family law attorneys at Hoover Krepelka can help safeguard your interests and provide the guidance you need to establish the strongest possible financial start for your post-divorce life. If you’re unsure of your rights and obligations surrounding joint loans property division, we can provide clear advice and forceful representation for your individual situation. To schedule a consultation, fill out the form below today.
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Frequently Asked Questions
How are joint loans typically divided in a divorce?
Joint loans are usually divided based on the divorce agreement, with courts often assigning responsibility to one spouse or requiring both to remain liable. However, creditors can still pursue either party for missed payments unless the loan is refinanced or paid off.
What happens to a mortgage if one spouse keeps the house?
If one spouse keeps the house, they typically refinance the mortgage in their name to remove the other spouse’s liability. If refinancing isn’t possible, both parties may remain on the loan, even if only one lives in the home.
Can joint debt impact property division outcomes?
Yes, courts consider joint debt when dividing assets, and a spouse assigned more debt may receive a larger share of marital property to balance the division. However, creditors aren’t bound by divorce agreements, so both spouses may still be liable if debts go unpaid.
