Dividing Debt in Divorce
Property division in divorce involves not only property but also debts and liabilities incurred by the parties. Just like a property, debt can be characterized as community or separate. The division of debt depends on its character, the person who incurred it, and the type of debt. Some kinds of debt need a different method of division. In this article, we will discuss debt incurred during the marriage and how it is treated during property division in divorce.
Characterization of Debt
I. Community Debt
Debt can be classified as community debt if it was incurred after the date of marriage but before the date of separation for the benefit of the community. It’s important to note the date of separation of the parties because it determines whether a debt belongs to the community or not.
When it comes to community debt, it must be divided as equally as possible. Its value must be determined as near as possible to the time of trial.
For debt arising from a contract, the debt will be considered as community debt if the contract was made during the marriage, regardless if it only became due after the separation.
II. Separate Debt
Separate debt refers to debt incurred solely by a spouse and not for the benefit of the community. Separate debt mostly refers to debt incurred before marriage or after the date of separation. Separate debt will not be subject to division and will be assigned to the spouse who incurred it. It is considered separate even if it was incurred during the marriage so long as the intent was not to benefit the community.
Possibility of Unequal Division
Courts are required to divide the debt as equitably as possible. This may lead to a scenario where the debt is divided unequally, such as when one spouse receives more of the community property. The spouse who received more of the property can also be given more community debt in this case.
Dividing a Mortgage
A mortgage is more complicated in terms of property division. It cannot necessarily just be divided between the spouses, unlike other forms of debt. However, there are still options for a mortgage.
Sell The House
The first option is the sale of the house. The parties can opt to sell the house, pay off the mortgage with the proceeds, and divide the remaining proceeds between them. It is often the most straightforward option for spouses.
The second option is for the other spouse to buy out the share of the other spouse. This will involve refinancing the mortgage and removing the other spouse’s name from the mortgage. This way only one spouse’s name will remain on the mortgage.
The third option is reimbursement. This option applies in cases where the house is separate property of a spouse, but the other spouse makes contributions to the said separate property. The contributions can be in the form of mortgage payments or improvement to the house. In such a case, the contributions of the spouse can be subject to reimbursement provided that the funds are traceable to a separate source.
Debts Incurred After Separation
The following are the options for debts incurred after the date of separation but before entry of judgment of dissolution or legal separation:
- Debts incurred by either spouse for the common necessities of life of either spouse, or the necessities of life of the children of the marriage from whom support may be ordered, must be confirmed to either spouse according to the parties’ respective needs and abilities to pay at the time the debt was incurred. This provision is applicable in the absence of a court order or written agreement for support or the payment of these debts.
- Debts incurred by either spouse for nonessentials of that spouse or children of the marriage for whom support may be ordered must be confirmed without offset to the spouse who incurred the debt.
Debt Incurred After Entry of Judgment
For a debt that was incurred after entry of judgment, it will be assigned to the spouse who incurred the debt and will not be subject to division.