Debt Allocation

In California, debt is considered to be either marital or separate – much like actual, physical property. In other words, the same classifications that apply to property allocation, apply to debt allocation in California as well. This means that both spouses are responsible for any debts acquired during the marriage, despite who actually spent the money. Thus, when property is allocated, the person who is rewarded an asset usually also bears any responsibility for loans against that asset.

Debt allocation is another issue that may be resolved to each party’s satisfaction during mediation. Each spouse gets a chance to tell their story relating to debts incurred and how they wish the property to be divided. Discussions will also involve who would carry the debt forward after the divorce. For the most part, it is in a couple’s best interests to pay down or off as many debts as possible before a final decree is issued. If a couple is unable to pay off their debts, then the decree states which party must pay each debt, within a designated period of time. It you wish to retain control over issues like this, mediation is worth considering.

California is a community property state and as such, any assets or income earned or obtained by either spouse during your union, and just prior to your separation, are considered to be community property. This general rule of thumb is applicable to liabilities and debts accrued as well; they are a community obligation. As always, there are exceptions to this rule, and a skilled mediation, family lawyer will explain your options, including the possibility that some of the debts in question are separate and exclusive to just one spouse, and would not be considered to be a community obligation.

What is a separate debt? A separate debt may include bills accumulated by a spouse prior to a marriage or declaration of a domestic partnership, or incurred after a legal separation. An example would be a business debt or credit card obligations. However, if the partners, after forming a union, pay separate debts with joint funds and then find themselves facing dissolution, the joint/community estate may be legally entitled to be reimbursed for the amount paid.

What is an anti-community debt? These are debts assumed during the partnership/marriage, but were not assumed for the benefit of the community estate as a whole. This type of debt may entail legal fees, interest penalties and other costs incurred as the result of defending a civil or criminal action. This kind of debt would remain with the partner who incurred it.
There is a high risk of being held liable for various debts in marriages, as each partner strives to lighten their debt load by shifting as much as they can to the other partner. Debt that might not be assumed for the benefit of the partnership or marriage may, nonetheless, still benefit the spouses. If such is the case, the spouses/community are obliged to repay that debt.

There are usually four types of debts: divorce debt, taxes, secured and unsecured debt. Unsecured debt includes items such as loans from parents or relatives, credit cards, lines of credit and personal bank loans. These debts may be split evenly, although the court does consider who is best able to pay. For unsecured debt, a mediated separation agreement must include a hold-harmless clause to indemnify the nonpaying spouse.

Secured debts relate to loans on assets, such as vehicles, real estate and/or a mortgage on a home. The separation agreement must spell out clearly who pays which debt, and specify that if one of the parties does not make a payment, the creditor may pursue the other spouse. Issues relating to who pays which debts should be in writing, as part of a clearly understood legal agreement. Without such an agreement, a legal decision and subsequent financial outcome can turn out to be two entirely different things.

A divorce settlement does not exempt the parties involved from possible future taxes. For three years after a divorce, the IRS may still conduct a random audit of your last joint tax return and retains the ability to ask questions about such a return for seven years, or demand an audit if they suspect fraud. Tax issues must be outlined in painstaking detail during mediation and address the possibility of penalties, found taxes and additional interest owed, and determine and who will defending any potential audit.

Expenses acquired during a separation are usually the responsibility of the person who incurred them. However, there are some exceptions, relating to providing necessities. Other shared costs may include legal fees, filing fees, appraisals, accounting, counseling, financial planning, title transfers, and mediation. Any mediated separation agreement spells out who is responsible for those expenses. It is a complex process, but California Divorce Mediators has extensive experience in assisting divorcing couples reach an agreement through the auspices of mediation.

Contact California Divorce Mediators by email or phone, to discuss mediation, legal separation, same sex separation, domestic partnerships, debt allocation, property allocation, child custody or dissolution. Mediation may be a viable and reasonably priced alternative to expensive litigation.