Since every modern marriage is unique, some people choose to pay their bills and deposit their paychecks into joint accounts, while others prefer to keep separate accounts and view everything as "ours." However, the law doesn't consider these distinctions in a community property state like California.
It’s crucial to understand the circumstances under which spouses are or are not responsible for each other's debts. When one partner files for bankruptcy, faces a lawsuit for unpaid debt or other liabilities, becomes the subject of a collection action, or passes away, it can significantly impact the other spouse. This blog explains, in detail, the debt relationships between partners.
Community Property
According to Section 760 of the California Family Code, the state of California recognizes community property. This means that any assets and earnings acquired by either partner during their marriage are considered community property.
Even if the title of an asset only names one spouse, any assets purchased with community funds are still considered community property. The fact that both spouses have equal ownership of community property allows the family court to make decisions regarding its division.
Separate Property
Separate property includes the following:
- Property obtained either before or during marriage with money from separate sources
- Property obtained during a marriage, such as a gift, devise (by will), or inheritance
A partner's separate property does not become community property just because they got married. Issues, rents, and profits earned from independently owned property also remain a partner's separate property.
Furthermore, under California FC 771(a), an individual's accumulation and earnings after their separation date count as their separate property.
How Community Property Works
Most properties acquired during a marriage are regarded as community property under California law. There are three separate property owners in any marriage:
- Partner A
- Partner B
- The Community
Any property that either spouse possessed before marriage continues to belong to them individually. However, assets that one spouse receives as a gift or inherits during the marriage are seen as separate property.
If one partner inherits or receives a gift of property they owned before they got married, that partner is entitled to the income from it. This includes both income from the inheritance and profits made from the property. If either spouse gains any additional property during the marriage, it usually counts as the community's property.
However, California spouses can agree to a contract where certain types of properties that could be considered community property remain separate property. It can be challenging to distinguish between community and separate property. It is a subject that is often disputed in divorce proceedings. Therefore, if one partner or another becomes the target of a debt collection case, it is crucial to fully understand the matter or seek guidance from a knowledgeable legal professional.
Principles of California Community Property
The basic principles of community property are as follows:
Marital Property Is Assumed To Be Community Property
Payroll, perks, and lottery winnings are all considered community property if they were earned or obtained during marriage. Any assets that one partner brings into the marriage remain their personal property. Gifts and inheritances received during a marriage belong to the partner who received them individually. If you take no action, everything you acquire during your marriage will equally belong to both of you.
Each Spouse Has An Equal And Undivided Interest In Any Community Property
When two people get married, they have an equal stake in the community, even though each spouse only receives half of it.
Community Property Is Accountable For Any Debts That Either Partner Incurs While They Are Engaged
Any obligation of any partner affects the entire community property, which means that the judgment creditor of the other spouse may garnish one partner's wages. You are all financially interconnected in this situation.
Community Property Accounts For Any Debts Brought Into The Marriage By Either Partner
Debts incurred before marriage by either partner are also subject to community property liability. There's a minor exception in this case. If the earnings remain in a different bank account that is only accessible by the earning partner, they cannot be garnished to pay off the other's premarital obligations.
Partners Can Opt Not To Own Joint Property
In most situations, the community property system counts as a default arrangement. Spouses can decide whether or not they'll own community property by signing a postnuptial or prenuptial agreement. They can also decide which properties can be classified as community properties.
Additionally, they can decide to change the community properties to separate properties. The method by which they acquire title to real estate can serve as evidence of an agreement stating that it is not community property. Transmutations are only valid when documented in writing, demonstrating a clear understanding between both parties.
Property Acquired Following A Divorce Is Not Considered Community Property
Income earned after separation is considered separate property even if the couple is still legally united in marriage. Therefore, the separation date is often important in divorce proceedings. The dissolution of the marriage doesn't change the nature of property accumulated before separation.
All Community Properties Should Be Divided Equally Upon Separation
Each partner has the right to an equal portion of the community property upon dissolution of their marriage since the community belongs to both partners equally. They are free to come to their arrangement for splitting the property.
Debts Accumulated During Marriage
Most debts acquired during marriage are regarded as community debts. However, that does not imply that Partner B is now liable for any debt that Partner A accrued on his or her own during their marriage.
Instead, the obligation acts as the joint and several liabilities of Partner A and the community. As such, any asset deemed to be part of the community could be attached to pay off the debt. In practical terms, creditors could be able to seize Partner B's earnings and other assets that he or she accumulated during the marriage.
An example of community property is Partner B's paycheck, which is deposited into a joint bank account and can be used to pay off debts accumulated by Partner A during the marriage unless it is exempted. However, Partner B typically bears no personal responsibility for the obligation. This implies that Partner B's separate property, including property acquired before marriage, is typically not subject to a debt collection action.
This rule does have a few specific exceptions. For instance, California spouses are individually liable for obligations incurred by the other partner for necessities. This is because they owe each other a support duty.
Separate Property Designation
Married couples can reclassify their property in several ways under California law. This includes:
- Converting a community property into one partner's separate property
- Converting one partner's separate property into community property
- Separating one partner's property from another spouse's property
However, there are regulations. The partner who is sharing or giving up his or her property needs to put their intentions in writing. If a property transfer is discovered to be fraudulent, it could be invalidated. For example, if one partner transfers his or her personal property to the other intentionally to keep it out of reach of a creditor. Furthermore, even if separate property is mixed with community property, it could still be considered community property.
Issues Involving Community Property in Bankruptcy
The question of separate versus community property is often challenging to determine in bankruptcy. The bankruptcy trustee can attempt to reverse the transaction if the property in question has been separately classified by agreement, invoking property protection against creditors.
Additionally, there are cases where a separate property may be partially regarded as a community asset. Assume, for instance, that Partner A had a vacation property before getting married. However, the property had an outstanding mortgage that was settled during the marriage. In such a case, the courts will usually use a complex formula to figure out what percentage of the asset is community property. The most effective way to find out how your assets will be handled in bankruptcy is to speak with a professional bankruptcy attorney.
The Effects of Debt Sharing on Marriage
It's critical to know if you, as a married partner, are accountable for your spouse's debt for two reasons. First off, not paying a debt can have serious repercussions for you.
Negative balance transfers or late payments may have an impact on your credit rating and scores if you co-sign a loan or register a joint bank account. Furthermore, regardless of whether you reside in a common law or community property state, both of you could be sued for an unpaid debt.
In community property jurisdictions, creditors may attempt to seize jointly held properties to recoup debts held by a single partner. All of your real estate holdings, including your house, land, and car, may be included as part of the creditor's recovery process, along with your bank accounts. Therefore, if your partner defaults, you would still be obligated to pay off the debt, even though you might not have been entirely accountable for it.
If you and your spouse live in a state with community property and later divorce, each of you will be responsible for paying off your debts. But, depending on your state's divorce laws, any debts incurred after the marriage might be split equally between the two of you. Divorce courts in common-law states normally apply the equitable distribution rule, which leaves it up to the court to determine how marital debts should be divided.
Talk About Debt Before You Get Married
Before getting married, it's a good idea to discuss your financial status with your spouse so that you both know how much debt you have combined and who is paying for what. This conversation is also a chance to refine your debt-repayment plan.
Discuss whether the funds to pay off the debt will come from the joint household budget, for instance, if one of you is the only one who has debt when you get married. You should be aware in advance if your partner is not comfortable contributing to the repayment of your debts. Don't forget to carry on the conversation once you get married and take on additional financial obligations and debts.
Pre- and Post-Nuptial Contract
According to California FC 1500, a premarital agreement or other marital property agreement may alter the husband and wife's property rights as set forth by law. A postnuptial agreement is a legal document that a married couple can sign to specify how their assets will be divided in the event of a future divorce. In California, marriages consummated without a prenuptial or postnuptial agreement divide assets and income equally in the event of a divorce.
Notice to creditors is not necessary in California when a post-nuptial agreement is created. However, if it turns out that the post-nuptial agreement was made to obstruct or prevent debt collection, fraudulent conveyance laws may be invoked.
Does Your Credit Score Affect Your Spouse's Debt?
Your partner's prior debt does not directly affect your credit score, at least not directly. Your credit score will be impacted, though, if you get married and consent to having a joint credit card account or one where you are added as an authorized user.
More significantly, your spouse's debt management may have an impact on your credit score. Your score will suffer, for example, if a couple's credit card debt gets out of control and interferes with their ability to pay other debt, like a mortgage or car loan that they jointly own, as well as household bills.
Just like maintaining a low balance and making on-time credit card payments can raise both of your credit scores, failing to do so would lower your score. Your total debt-to-income ratio will rise as a result. A higher ratio indicates that your debt is greater than your income, which may make it difficult to obtain new credit or even maintain the open status of existing accounts.
Having more debt overall not only makes it harder to get new credit but also makes it more likely that you will default on any joint loans or obligations because you will have more monthly bills to pay.
Can a Single Partner File for Bankruptcy?
Similar to states without community property, California allows a married couple to file for bankruptcy jointly or individually. In states where community property is included in the bankruptcy estate, even when only one spouse files for bankruptcy, things get a little trickier.
It does not follow that a married Californian should never file for bankruptcy on their own. The best course of action for a particular couple will instead depend on several variables, such as the proportion of their property that is community versus separate and whether one spouse has a disproportionate amount of debt that is separate.
Seeking the advice of a seasoned bankruptcy lawyer is the best way to make this decision, as they can determine the most effective strategy for debt relief while safeguarding your most valuable possessions.
Am I Obligated To Settle My Partner’s Debt After His or Her Death?
In most situations, even if you serve as an executor of your partner's estate, you're not obligated to pay back their debts in the event of their passing. If a person has outstanding debt when they pass away, their property should cover the debt. Due to their backing by collateral, secured loans typically receive priority from the estate. Your partner's outstanding unsecured debt is likely to remain unpaid if they have no estate or if the deceased spouse's estate is not sufficient to pay off all of their obligations.
Am I Accountable for My Partner’s Debt After Getting a Divorce?
In the event of a divorce, state laws as well as any prenuptial agreements you signed will determine your legal responsibility for your partner's debt. Regardless of the place you live, you will be held accountable for the debts if you took part as a co-borrower or cosigner.
Repayment plans for debts are frequently negotiated as part of the divorce settlement. Remember that a divorce could have a lasting effect on your credit report. For example, if you and your ex-partner agree to settle the loan payments and one of the partners doesn't, the missed payments would be reflected on your financial record if you shared them.
Can A Debt Collector Call My Partner?
Third-party debt collection firms are restricted in who they can reach about your debt under the Fair Debt Collection Practices Act (FDCPA). One of the few people a debt collection company can speak with about the specifics of the debt is your partner.
To prevent debt collectors from contacting you, it is advisable to request that they communicate exclusively with you and your spouse through your attorney. The Fair Debt Collection Practices Act states that if debt collectors are aware that you have legal representation, they may only contact you through your lawyer. However, this is only applicable if your lawyer refuses to respond or permits direct communication.
Find A Los Angeles Bankruptcy Attorney Near Me
Cases involving debts can be inherently challenging, time-consuming, and intricate, especially in cases involving family laws. Thus, it is crucial to seek the guidance of a lawyer who can expertly guide you through this intricate world of debts, and possibly bankruptcy issues if you need to file for bankruptcy. If you are in the Los Angeles area, we at Los Angeles Bankruptcy Attorney are here to provide the necessary support to safeguard your legal rights. Call us today at 424-285-5525 to learn more about how we can help.
