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Liability On Community Debts After Divorce

June 2011

Many times after a divorce, individuals find themselves in a situation where they are considering filing for bankruptcy. This can be because of circumstances which occurred during the marriage, or, may arise because an individual finds that he or she is no longer able to keep up with payments on certain debts without the income of the other spouse.  

Debts generally arise during the marriage in one of three ways: (1) contracts (created by agreements between both or one spouse and a creditor, including debts such as credit cards, mortgages or car loans); (2) tort liability (which arises from the negligent or willful acts of one or both spouses, such as a car accident); and (3) statutory/legal (such as taxes or court orders).  

California is a community property state. Community property is generally described as property that is acquired by a spouse during marriage in any way other than by gift or inheritance. Community property is presumed to be liable for either spouse’s debts or for the joint debts of the marriage.  Thus, debts that were incurred during the time of marriage, even if only incurred in one spouse’s name, are presumed to be the debt of both spouses. Separate property of one spouse cannot usually be held liable for the debt solely attributable to the other spouse, but a spouse’s separate property can be liable for that spouse’s sole debts and the debts of the marriage (community debts).  

After a divorce, an important principal to remember is that these debts incurred during the marriage are generally considered to be the shared responsibility of both spouses as far as creditors are concerned. After a divorce, the community property is divided between each spouse and becomes the respective spouse’s separate property. After the divorce, with respect to a particular debt, the determination must then be made as to where the personal liability for that debt lies – whether in an individual spouse or whether both former spouses continue to be liable on the debt.  

Generally, a spouse will be liable on a debt if he or she incurred that debt (i.e. he or she signed the documents to obtain a credit card, purchased an asset through financing, incurred debt in the operation of his or her business, or caused an accident that injured someone.)  Further, the non-signing spouse may also be held liability on these debts if they were incurred during the marriage.  

During a divorce, the divorce court has the authority to divide the debts of a marriage and assign personally liability to either spouse. Although the divorce decree or divorce settlement will usually divide the debts between the spouses and assign responsibility for each debt to one spouse or the other, the divorce decree or divorce settlement is between the spouses, and it generally does not bind the creditor, who is usually able to attempt to collect the debt from either spouse. Just because the debt may be assigned to one spouse, the liability for that debt has not been eliminated, rather, the spouse has simply agreed to pay the debt. If he or she does not pay, creditors may still come after the other spouse for satisfaction of the debt. 

Typically after divorce, the portion of the community property awarded to one spouse is not liable for the debts of the other spouse, unless the spouse was specifically assigned a particular debt by decree of the court or agreement between the parties.  However, if the spouse assigned a particular debt declares bankruptcy, the non-debtor spouse may still be sued by the creditor of the debtor spouse to recover the debt.

Example: A couple gets divorced and have joint debt such as a credit card or bank loan in both spouse’s names. In the divorce agreement, the husband agrees to pay one-half of the joint debt. The husband fails to pay the debt and declares bankruptcy. Wife and her property will be liable for 100% of the debt even though the husband agreed to pay one-half.

A bankruptcy discharge generally affects the personal liability only of the debtor spouse. This means that typically, if one spouse obtains a discharge of his or her debts through a bankruptcy proceeding, the creditor may still attempt to collect the debt from the non-filing spouse if that spouse is also liable for the debt. Further, many times agreements or court orders made in connection with the divorce which require one spouse to indemnify the other spouse if a creditor attempts to collect a certain debt from the non-filing spouse, are potentially dischargeable in a bankruptcy proceeding, allowing the filing spouse to avoid payment of the debt altogether. In this circumstance, it is necessary for the non-filing spouse to bring an action in the bankruptcy court to request the obligation not be discharged. In addition, the non-filing spouse may typically bring an action against the filing spouse to recover for the sums paid by the non-filing spouse in satisfaction of the filing spouse’s debts. 

In the above example, the wife has the right to sue the husband for indemnity or reimbursement in the divorce court. The problem is that if the husband has no money, a judgment against him will be worthless. In this situation, to fully protect herself from the husband’s creditors, the wife should file for bankruptcy herself, which would typically result in a full discharge of the debt and the elimination of the possibility of the husband’s other creditors from pursuing her for any more of the husband’s unpaid debts. 

Because of the complexity bankruptcy adds after divorce, it is necessary to have an experienced attorney guide you through the process. Contact Shein Law Group, PC online or at (559) 478-2980 for a free initial consultation.
       
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