Divorce and Debt

California is a community property state which means that all debt acquired during the marriage will be considered an obligation equally shared by both spouses. All credit card debt, car loans, home loans and all other debt obtained during the marriage are the responsibility of both parties regardless of whose name is on the debt.

Generally, all debts incurred by either spouse after the date of marriage and before the date of separation are considered community debts and each spouse is responsible for 50% of the amount owed.  All debts incurred by one spouse, before the date of marriage and after the debt of separation are generally considered the separate debt of that spouse.

When community funds are used to pay the separate debts of one spouse or when the separate funds of one spouse are used to pay community debt, there might be reimbursements and/or credits  due to or from one spouse to the other.  There are also special rules for potential reimbursements for education loans.

Just as property should be divided considering current and long-term tax and financial consequences, so should debt.   For example, interest rates, the amount of the payments and potential tax deductible interest are some of the issues that should be considered when dividing debt.

It is important to remember that even though your divorce settlement agreement identifies who is responsible for each debt; your creditors will consider each spouse responsible for 100% of the balance owed, until it is paid off. Therefore, you may want to consider paying off debt prior to finalizing the divorce. Ultimately, all loans, credit cards and other debts that were established jointly with your ex-spouse should be closed to avoid the risk of becoming responsible for debt incurred after the divorce is final.

If you have community debts that have to be addressed as part of your settlement, I recommend that you work with a divorce financial analyst to help you identify immediate and long-term financial and tax issues that you should consider.

You should consult with a family law attorney for specific legal advice regarding your rights and obligations related to your debts.

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