- Understanding the two types of debt in California
- Who is responsible for debts after separation?
- Two terms you should understand
- Debt and property in California
- What about student loans?
- How to divide debt in divorce
- References
California is one of nine community property states. The items you bought and the loans you took out during your marriage are owned jointly by your community of two. During a California divorce, you must split them equally between you.
Most people want to keep all the items and forget all the debt. That’s human nature. But the California court must approve your plans, and judges rarely accept proposals that saddle one party with too many responsibilities. Working toward fairness can help your divorce move swiftly through the court system.
Understanding the two types of debt in California
California laws divide debts into two categories: community debt and separate debt. Understanding them can help you determine what you might owe after a divorce.
- Community debts are loans or obligations you took on together during your marriage. Examples include a car loan, a mortgage, or a credit card balance.
- Separate debts are those you owed before you were married or after you separated. Those could be things like credit card debts from before your marriage or car loans you signed before your wedding day.
Is a debt community or separate? Answering that question means understanding your date of separation. In California, that’s defined as one of the following:
- The day you told your spouse you wanted to end the marriage
- The day you did something (like move out) that indicated you wanted to end your marriage
After that day, your actions were consistent with someone who wanted a divorce. For example, you didn't move back in.
Some courts use a two-part test to determine a date of separation. In an objective test, the court determines when you started living apart. In a subjective test, the court determines at what point you both thought the marriage was over.
Who is responsible for debts after separation?
Some divorces take a long time to resolve, and you might incur debts during this time. Who is responsible for credit card debt in a California divorce? Who is responsible for other types of debt?
California courts require people to trade financial documents within 60 days of filing for divorce. These documents are required:
- Declaration of Disclosure (FL-140)
- Income and Expense Declaration (FL-150)
- Schedule of Assets and Debts (FL-142)
You will fill out one set, and your partner will do the same. As the end of your divorce nears, the courts can refer to the balances listed on your forms as shared debts. If a balance is much higher, and you have receipts that prove that the other person spent it, you shouldn’t have to cover the balance.
These situations are very delicate. If possible, talk to your spouse about how you’ll handle monthly expenses during the divorce process and ensure you stick to a budget that doesn’t rack up more debt.
If you can’t talk with your spouse, the courts can help. Per California laws, judges can require people to share debts involved in supporting children. Other debts can be split in a manner the court deems fair.
Two terms you should understand
You may hear terms tossed around about debt splits during your divorce. While you may not find them in California laws, they could apply to how your assets and debts are split.
These are the terms you should know.
Epstein Credits involve one spouse paying all of the community debt after a couple separates. Those credits could be used to order the other party to pay a share of their marital obligation.
Watts Charges involve one party using community assets after separation, such as living in the family home after the date of separation. In these cases, the spouse who isn’t using the asset could ask for half of the value of it.
Debt and property in California
Debts and assets acquired during the marriage are community property, and they must be split equally during divorce. The concept is simple, but the details can be delicate.
Your community begins on the day of your marriage.
Any debts you acquired between your wedding day and your day of separation are shared, including the following:
- Mortgages
- Car loans
- Credit card charges
- Home equity loans
What about student loans?
Student loans come with slightly different rules. Money you borrow for your education typically remains with you, even if you took out the loan while married.
Exceptions do exist. Some people pay student loan balances with community funds during the marriage. They open a joint checking account, mingle all of their money there, and pay the balance out of those funds.
In a situation like this, the spouse who did not get the education could get reimbursed for the money spent to pay down the balance. Often, this requires a lawyer.
Watch: California Divorce: Understanding Form FL 142 (Schedule of Assets and Debts)
How to divide your debt in divorce
You understand when your marriage started and stopped. How much did you borrow during that time? Gather all of your statements, bills, and receipts. The information you collect can help you negotiate a fair settlement with your spouse.
Your options to split community debt include the following:
- Allocating: If your debts are easily divided, one party could take half. For example, you could accept the credit card debt while your partner pays off the car loan.
- Selling: Cars, boats, and other transferable items could be meaningful fundraisers to help you end your marriage without debt. If you unload these items or give them to your spouse, it could make the financial situation easier to resolve.
- Borrowing: You could take out new loans in your name to cover your shared debts. This is sometimes a smart option for divorcing couples, as banks and other lending institutions rarely honor divorce agreements. If your spouse skips a payment, you're on the hook, even if you tried to discharge that debt in your divorce settlement.
- Accepting: You could agree to pay back a large portion or all of your debt in return for something equally valuable (such as the entirety of your retirement account).
No option is right for all couples. Instead, you're encouraged to have a frank discussion with your partner about what you have, want, and need. Together, you can collaborate on a solution that works for you both. And since California requires a six-month waiting period for divorce, you have plenty of time to connect and work out the details.
To make decisions during your divorce, you can do one of the following:
- Collaborate independently. Create an accurate list of all of your debts and assets. Propose a split that seems reasonable to you, and ask your partner to review your plan and offer feedback. Trade documents back and forth until you find a plan you can both accept.
- Work with a mediator. Accepting debt isn't easy, and some people struggle to create plans everyone can agree to. A mediator is a trained professional who can help you hold constructive talks with your partner. You can use a mediation session to work through one or two difficult problems, or you can ask this person to assist with your disagreements. They can help you find resolutions that seemed impossible initially.
- Opt for a default divorce. You can get divorced even if your partner doesn't want to and won't collaborate on the process. In a default divorce, you submit paperwork to the court outlining your plans for community property and debt. If the proposal seems fair and your spouse is refusing to participate, a judge will rule on the divorce without consulting your spouse.
Splitting your debts can seem difficult or overwhelming. But with time and patience, you'll create the right plans for you, your spouse, and your future.
Not sure if mediation will work for you?
Our free download can help.
References
What Is Community Property? American College of Trust and Estate Counsel.Property and Debts in a Divorce. Judicial Branch of California.
Common Challenges When Splitting Debt. Judicial Branch of California.
Make Decisions. Judicial Branch of California.
Gather and Share Financial Information. Judicial Branch of California.
Family Code, Division 7, Part 6. California Legislative Information.
