While there are some basic rules surrounding California divorce debt division, discussed below, it can be a complicated area of law. Determining the character of debt (e.g., whether it's a joint debt or separate debt), whether either spouse is entitled to reimbursement, and how to make an equal division is not always straightforward. Therefore, in many cases, it's a good idea to consult with an experienced family law attorney for advice.
California is a "community property" state, which means that generally, assets acquired and debts incurred by either spouse during the marriage belong equally to both spouses. (Cal. Fam. Code § 2550.)
Unless the spouses entered into their own agreement as to the division of property and debts (e.g., a prenuptial agreement), a court will order the judge to divide community property and debts equally between the spouses in a divorce. While the court may not divide each asset and debt in half, the goal is to end up with an equal division.
An exception to the equal division rule arises when the value of the community debts exceeds the value of the community assets. In this situation, the law allows courts to order an unequal division of the debts by assigning the excess debts to the spouse who is in a better financial situation to pay them.
For more detail, see Dividing Marital Property in a California Divorce.
When dividing a debt, the first task is to determine the debt's character: that is, whether it's "community" or "separate." (Cal. Fam. Code § 2551.)
Community Debt: In general, community debts are those incurred after the date of marriage, but before the date of separation. Debts incurred during marriage belong to both spouses equally, even if only one spouse incurred them (eg., only one spouse signed the credit card slip).
For example, if during the marriage, one spouse purchased all of the children's clothing and other necessary items using one credit card in only that spouse's name alone, both spouses are still equally responsible for the charges made on that card. Similarly, both spouses are responsible for one spouse's income tax obligation, as long as it accrued during the marriage. (Cal. Fam. Code § 2622(a).)
Separate Debt: Debts incurred before marriage or after separation are separate debts and belong only to the spouse that incurred them. (Cal. Fam. Code § 2621.)
The date of separation is significant because judges typically consider debts incurred after a couple separates as separate and will assign the debts to the spouse that incurred the post-separation debt. (Cal. Fam. Code § 2622 (b).)
Determining the date of separation is not always straightforward. Sometimes, courts must hold a trial just to determine the date of separation before the judge can move forward on any other matters. Under California law, there is a two-part test to establish the official date of separation:
1) First, there must be a physical separation between the spouses. Physical separation is easy to determine when one of the spouses moves out of a shared home. However, courts may also find a physical separation occurred when spouses began sleeping apart, for example, in separate areas of the same home.
2) Second, in addition to physical separation, one of the spouses must have an intent to end the marriage. A temporary or trial separation will not satisfy this intent test.
Dividing the family home and mortgage can be complicated. The most straightforward case involves the following scenario: a couple buys a home together during their marriage and uses only community funds for the purchase and mortgage payments. Upon divorce, this couple will be equally responsible for the mortgage. In this example, a court may order the couple to sell the home to a third-party, and divide the net sale proceeds equally between the spouses.
Alternatively, the court may order that one spouse buy out the other spouse's share in the home and refinance the mortgage so that the buying spouse is solely responsible for the mortgage going forward (the selling spouse should not remain on the mortgage).
In more complicated cases, there are some mixed community and separate interests in the home and mortgage. For example, one spouse might own a home before the marriage, and during the marriage the other spouse may contribute to the mortgage or pay for improvements to the home. Or, a spouse may use separate property funds to contribute to the down payment of a community property home. In these cases, a court may order reimbursement to the contributing spouse, if the funds for the contributions can be traced back to a separate property source. (Cal. Fam. Code § 2640)
Lots of issues arise between the date of separation and the final divorce. Who will stay in the home? Who will pay the mortgage? When a couple separates, and only one spouse continues to pay the mortgage for the family home but doesn't receive the benefit of living there, the paying spouse may be entitled to reimbursement.
Under California law, a court can order that one spouse reimburse the other when the spouse uses separate property funds to pay community debt after the date of separation and before the divorce. (In re Marriage of Epstein, 24 Cal.3d 76 (1979).)
For example, if a spouse moves out of the marital home but continues to pay the mortgage with his or her post-separation income (or other separate property funds.) The spouse can request reimbursement for some or all of those payments. However, the court will not order reimbursement under the following circumstances:
The spouse seeking reimbursement must be able to show that the money used to pay the mortgage was from separate property funds.
In contrast to reimbursement for Epstein Credits, the court may charge a spouse who has exclusive use and possession of the family home between separation and divorce with "Watts charges" - the fair rental value of the home for that time period. In sum, if one spouse stays in the family home after separation, while the other spouse covers the mortgage, a court may award the paying spouse "Epstein credits," and assign "Watts charges" to the spouse living in the home. In other words, spouses that have exclusive use and possession of the family home during divorce proceedings may end up owing the other spouse the equivalent of one-half of the fair rental value for the entire period of possession. (In re Marriage of Watts, 171 Cal.App.3d 366 (1985).)
Again, this can be a complicated area of the law, so it's a good idea to consult with a family law attorney for more information and advice.
You can find the California statutes (laws) regarding the division of debt in a divorce in the California Family Code, sections 2550-2556, 2620-2628, and 2640-2641.
If you have questions, you should contact a local family law attorney for help.