“Marital debt must be addressed early to clarify which obligations will be the responsibility of each party. Then steps must be taken with creditors to transfer all debt liability to the responsible party.” – DENISE FONTYN, CDLP, with the Divorce Real Estate Institute, Inc.
Recently, we talked about the 6/36 Rule and how it affects a divorcing spouse’s ability to stay in the family home. Today, we’ll discuss the separation of marital debt in preparation for an impending divorce.
The first point to understand is that, according to the California Courts, your agreed-upon division of debts and assets is not binding until it’s signed off by a judge. So, until you get the final OK from the court system, you and your spouse still share responsibility for the repayment of your monthly expenses, including the mortgage loan.
The next point to consider is that once you and your spouse agree to a property and debt division, you must follow through by reorganizing ownership of your assets and debts with the respective lending institutions. For instance, any jointly held credit cards must be moved solely into the responsible spouse’s name. Likewise, the title to a jointly owned home must be reassigned and the non-owning spouse removed from the deed. Removing a spouse from the deed does not release that spouse from repaying the loan, however, so if there’s a mortgage on the house, as is usually the case, it will need to be refinanced by the occupying spouse.
Now that we’ve covered the pertinent must-knows, let’s get into the nitty-gritty.
Step 1: List your assets
This step is as simple as it sounds. You’re not assigning ownership of—or responsibility for—anything at this point, you’re making a list of what you own and what you owe. In California, you’ll do this on Form FL-142: Schedule of Assets and Debts.
Step 2: Distinguish between community and non-community (separate) property
Community property is generally defined as all income and debts acquired during the marriage, plus all the things you and your spouse purchased with that income.
A word of warning: separate property can become community property if it’s not kept separate.
Separate property is generally defined as anything either spouse owned before the marriage. This can include gifts, an inheritance, personal injury awards, proceeds from a vested pension the spouse collected before the marriage, plus any property purchased with those funds. A business owned by a spouse before marriage could also be considered separate property unless the new spouse worked in the business, or the business increased in value during the marriage.
It’s worth saying twice: separate property can become community property if it’s not kept separate. Making the distinction between community and separate property can be a complicated issue, so be sure to seek legal advice to properly categorize your assets and debts.
In certain circumstances, a property or debt could be considered both community and separate. You’re advised to consult an attorney for more information on how to identify and split these items, as well.
Step 3: Divide your community-property assets and debts
Here’s where things can get a little hairy. Unless you and your spouse are divorcing on good terms, it may be difficult to split your property equitably. It can be all too easy for one spouse to try to keep all the good stuff (the house, the car, the kids) and dump all the bad stuff on the other spouse (the broken lawnmower, the aging couch, the maxed-out credit cards). This is where a good divorce attorney comes in handy.
It can be in your best interest to predetermine what goes to whom, and the more impartial you and your spouse can be with one another on the front end, the faster (and more cost-effective) your divorce proceeding will be.
Be aware that if you and your spouse can’t decide on a fair distribution of your things, distribution will be decided for you. This person, called a Trier of Fact (basically, a judge) will step in and tell you what you get to keep and what goes to your spouse.
Once you have an idea of what will go to whom, each of you should hire your own qualified attorney to review the list and advise you on aspects of the division you may not have considered, such as debt assignments that may be equal but not necessarily equitable. (More on that here.)
Step 4: Get help with the house
A good attorney is critical when it comes to handling the disposition of your house. In fact, there are so many aspects—and expensive pitfalls—to consider in a divorce real estate transaction, that it’s worth asking your attorney to partner with a qualified expert like a CDRE.
Calculating equity correctly and understanding the financial impact of a divorce buyout should one of you decide to stay in the home are critical to determining the best course of action for what is arguably the most valuable asset you and your spouse own. And if the house has problems, you’ll need to know how those problems affect your home’s selling price, should you decide to sell and split the proceeds.
For more information, or to enlist the help of a neutral real estate divorce expert, call me. I’ll work with you and your spouse to determine the best course of action regarding the disposition of your home so you can start your post-divorce life on the best footing possible.