Orange County Divorce Division of Assets: Understanding Debt Division and Property Rights in Divorce

Debt division is where many divorce cases get messy. You’d think splitting up what you owe would be straightforward, but it’s not. While everyone focuses on who gets the house or the retirement accounts, debt can actually cause more problems down the road if you don’t handle it right.

In a perfect world, separating couples would work out a division of their debts that they both believe is fair. The general rule is that all debts incurred during marriage is community debt, regardless of whose credit card or account the debt is found. This will often have a disproportionate effect on the spouse that makes less income.

Here’s what catches people off guard: California doesn’t care whose name is on the credit card bill. If the debt happened during your marriage, you both own it equally. That means if your spouse went on a shopping spree while you were married, you’re on the hook for half of it, even if you never saw the purchases.

The Complexity of Property Division

When the parties divide their debt, they should come up with an agreement that divides everything fairly and equally, so that each party ends up with roughly the same value debt. By doing so, an actual division of debt or accounts may not physically occur, but an equal division of the value of the debt should occur.

But here’s where it gets tricky. Just because you both agree on who pays what doesn’t mean the credit card companies care about your divorce agreement. They’ll still come after both of you if payments stop.

However, until a judge enters an order ratifying the agreement, your community debt still belongs to both of you and does not become separate, even if you have agreed on how to divide the debt. And even after the judge signs off, you’re not completely off the hook for your ex’s debts.

Understanding the Financial Aspects

In order to start dividing your debts, you should begin by making a list of all loans and debts you and your partner have acquired and currently owe. It’s a good idea to write your list down in a spreadsheet or somewhere easily accessible again, as the list will be extremely useful in completing a key Court form needed for your divorce.

That form is the FL-142, Schedule of Assets and Debts that each party must exchange as part of their Preliminary Declaration of Disclosure as required by Family Code § 2104.

Don’t just look at the obvious stuff like credit cards and car loans. We’re talking about everything: medical bills sitting in a drawer, money borrowed from your parents, that loan you forgot about from three years ago. If you owe it and it happened during marriage, it needs to be on the list.

Most people forget about things like unpaid taxes, professional fees from lawyers or accountants, or charges on store credit cards they never use. These debts don’t disappear just because you’re getting divorced.

Liabilities

It is important to remember when dividing debts, that does not entirely free you from liability regarding that debt. For example, when you obtained that credit card or loan, it may have been issued on the basis that both you and your partner guaranteed to pay that money back. Even if you agreed to take on the debt, a person your former partner owed money to could go after your former partner for that debt, regardless of whether you agreed to be responsible for it and vice-versa.

This is the part that keeps divorce attorneys up at night. Your divorce paperwork means nothing to Chase or Bank of America. When you both signed that credit card application years ago, you both promised to pay. That promise doesn’t disappear because a family court judge says your ex is supposed to handle it now.

Further, if your partner misses a payment on a credit card they agreed to pay, then you may end up having to pay the balance, the interest, and the late fees, in addition to possibly having your credit rating dinged.

We’ve seen this scenario play out dozens of times: the divorce is final, everything seems settled, then six months later one spouse gets a call from a debt collector because their ex stopped making payments. Suddenly they’re scrambling to protect their credit score and dealing with debt they thought was handled.

Helpful Tip

To avoid these problems, we try and structure settlement agreements and orders to pay off all debts as part of the dissolution of the marriage. Yes, this might mean selling the house or cashing out retirement accounts, but it’s often worth it for the peace of mind.

When paying everything off isn’t possible, we get creative. Sometimes we can get debts refinanced into one person’s name only. We’ll close joint credit accounts immediately so no new debt can pile up. Life insurance can protect against the possibility that someone dies before paying off their assigned debts.

Courts have tools to deal with people who don’t pay what they’re supposed to, but enforcement takes time and money. It’s always better to prevent problems than fix them later.

Why It is Important

Debt problems from divorce can follow you for years. We’ve had clients whose credit got destroyed three years after their divorce because their ex-spouse defaulted on obligations. Others have had to declare bankruptcy because they couldn’t handle debt their ex was supposed to pay.

The good news is that most of these problems can be avoided with proper planning. Every situation is different, and what works for one couple might be a disaster for another. That’s why having someone who understands both the law and the practical realities can make all the difference in protecting your financial future.

Dividing the Family House

One of the most common questions asked by clients’ is what happens to the house. Sometimes, there is more than one piece of real property that has to be addressed, but usually it’s the house that your family is currently living in.

Decisions about your house are often emotional; in many cases, it’s the only home your children have ever known. For the Court, however, it’s just another asset that must be divided and in most cases it’s among your most valuable assets, which means it needs to be addressed wisely.

Generally speaking, you have two options. Sell the house or find a way to keep it after the divorce.

Even under the best circumstances, selling a home can be stressful, however, selling your home in middle of a divorce can be even worse. Truthfully, it doesn’t have to be.

Some of the decisions that need to be made about the sale of your house, include:

• • What repairs need to be done before listing the house for sale to maximize its sales potential and how will those repairs be made and the costs paid
  • How will a realtor be selected and what restrictions will be placed on the sale, if any?
  • When is the best time to list the property for sale?
  • Who will be responsible for paying the mortgage, property tax and insurance while the house is being sold?

How will the proceeds from the sale of the house be divided after it’s sold?
Every divorce presents a unique set of circumstances, which can have a significant impact on the ability to maximize the amount of money that is ultimately received by the divorcing couple. From our perspective, maximizing the amount of money and assets you retain after your divorce is critically important because money is hard to earn, and life is expensive. As such, we want to help you keep as much money as possible from the sale of your home.

Once a divorce is filed, Family Code 2040, known as the Automatic Temporary Restraining Orders, comes into play, which prohibits both parties from unilaterally selling, transferring, or borrowing against the home without a Court order or an agreement with the other party. The Court will almost never order a house sold before trial unless the house is at risk of being lost to foreclosure. If the house becomes at risk, however, expect the Court to order that it be immediately sold to protect the parties from losing a significant asset.

It is important to understand the how the Court views your property. First, there is a presumption that if the property was acquired during marriage that it is community property, which is not always the case. Second, being on title to the property and being responsible for the loan is different. Frequently, often during a refinance, one party is dropped from the title to the house, so that a loan can be obtained by the partner with better credit, with the understanding that once the loan closes that they will be put back on title. Sometimes that never happens, and the Court is asked to intervene during the divorce. Remember, the presumption is that all property acquired during marriage is community property unless that presumption is rebutted by evidence proving otherwise. This is an area where having an experienced Certified Family Law Specialist can really help out.

Selling the House

When selling your property, it is important to remember that both your interest and your ex’s interests are almost always the same – to maximize the sales value of the property and receive as much money as possible. This can, however, be difficult at times, but remember the reward for doing so can be huge.

Valuing Your Interest in the House

When valuing the interest in your house, remember that Internet websites like Zillow have no idea what the inside of your house really looks like and instead use algorithms to guess at its value. Sometimes their guess is not even close. A better alternative is to ask a qualified real estate agent (or appraiser) to conduct a Comparative Market Analysis, which requires the realtor to visit your house as part of the analysis. This is usually done before a listing price is suggested.

A common problem in making decisions during a divorce is trust. When one party makes a suggestion, the other party is suspicious of the suggestion, no matter how straightforward. For that reason, if your friend or family member is a real estate agent, they probably aren’t going to get the listing. Plus, it’s often unfair to put them in the middle of your divorce. For that reason, using a reputable realtor from a well-known company is usually the best choice. Often the names of some potential realtors are given to the other side, so they can choose which one to use.

When calculating the interests in the proceeds from the sale of the property, there are a few additional considerations that need to be made. First, was the house acquired during marriage entirely with money earned during the marriage? If so, the proceeds will be divided equally. If one or both parties used money earned before marriage or received by gift or inheritance as a down payment, then those funds will typically be returned to that party, before the remaining proceeds are divided. If the property was purchased before marriage, but payments towards the mortgage were made with money earned during the marriage then a formula established in the family law cases Marriage of Moore and Marriage of Marsden provide guidance on how to split the proceeds. These, of course, are just a few of the considerations that come into play when dividing sales proceeds. Also, remember that that any money you will get from the sale will be after the existing loan(s) are paid off and the costs of sale (including the realtor and escrow fees) are deducted. Additionally, if you made any upgrades to the home using the HERO (Home Energy Renovation Opportunity) or PACE (Property Assessed Clean Energy) program, those loans will have to be repaid through escrow, too.

If one of the parties is considering buying out the interest of the other owner, it’s important to be realistic. First, is your credit score, income and debt ratio enough to actually qualify for a loan on your own? Remember that being pre-qualified for a loan is not the same as receiving a loan from the bank – often pre-qualification letters are little more than an invitation to apply for a loan where the qualification will be much more difficult. Additionally, do you really want to stay in a house with bad memories. Maybe so. Also, it’s important to remember that if the existing loan is in both parties’ names, that the mortgage company is not going to care who got the house in the divorce. They have a contract with two people and unless a new loan is obtained (releasing the other party), they are going to expect that both parties will continue to be responsible for payment of the mortgage. This can have some significant unintended consequences if the person who received the house in the divorce fails to pay the mortgage. In that case, the mortgage company will ding the credit of both parties and pursue legal action against both parties because that is who their loan contract is with. Additionally, the home loan will continue to affect the borrowing ability of the party who no longer lives in the house as long as the loan is in their name, too. This may prevent them from truly moving on with their lives and later buying a new home, or car or other asset that needs a loan to acquire.

In some cases, one parties’ interest in the house might be traded during the divorce for an interest in retirement savings, a jointly owned business or for some other asset. Doing so often makes sense, especially if there are young children already established in school and other activities in the neighborhood, however, because there are also tax and other implications, these decisions should be made with the guidance and advice of a trained legal professional, which is why using a Certified Family Law Specialist makes the most sense. After all, why not use the most skilled professionals available to you?

Dividing Debt

In a perfect world, separating couples would work out a division of their debts that they both believe is fair. The general rule is that all debts incurred during marriage is community (joint) debt, regardless of whose credit card or account the debt is found. This will often have a disproportionate effect on the spouse that makes less income.

When the parties divide their debt, they should come up with an agreement that divides everything fairly and equally, so that each party ends up with roughly the same value debt. By doing so, an actual division of debt or accounts may not physically occur, but an equal division of the value of the debt should occur. However, until a judge enters an order ratifying the agreement, your community debt still belongs to both of you and does not become separate, even if you have agreed on how to divide the debt.

In order to start dividing your debts, you should begin by making a list of all loans and debts you and your partner have acquired and currently owe. It’s a good idea to write your list down in a spreadsheet or somewhere easily accessible again, as the list will be extremely useful in completing a key Court form needed for your divorce. That form is the FL-142, Schedule of Assets and Debts that each party must exchange as part of their Preliminary Declaration of Disclosure as required by Family Code § 2104.

It is important to remember when dividing debts, that does not entirely free you from liability regarding that debt. For example, when you obtained that credit card of loan, it may have been issued on the basis that both you and your partner guaranteed to pay that money back. Even if you agreed to take on the debt, a person your former partner owed money to could go after your former partner for that debt, regardless of whether you agreed to be responsible for it and vice-versa. Further, if your partner misses a payment on a credit card they agreed to pay, then you may end up having to pay the balance, the interest, and the late fees, in addition to possibly having your credit rating dinged. To avoid these problems, we try and structure settlement agreements and orders to pay off all debts as part of the dissolution of the marriage.