In nine U.S. states, any debt you racked up during your marriage is considered “community property.” These states’ laws will affect you in the event of an annulment, divorce or death of a spouse. Here are eight things you should know about community property states and credit card debt.
If you’re heading toward a split with your spouse, the place where you live can have a big impact on how your money, your stuff and your credit card debt get divvied up in a divorce.
In nine U.S. states – Arizona, California, Idaho, Louisiana, Texas, Nevada, New Mexico, Washington and Wisconsin – the income you earned, things you bought and debt you racked up during your marriage are considered community property.
Assets and debt in these states typically get divided into two piles: individual property belonging to each spouse and marital property. In many – but not all – community property states, this marital property gets split 50/50.
Community property states tend to have “hard-and-fast, bright-line rules” on dividing marital property, says Christopher Melcher, partner at Walzer Melcher, a family law firm in California.
But even in states that strive to split marital property 50/50, that doesn’t always mean each asset or debt gets split right down the middle, Melcher says.
For example, a husband who has a credit card in his own name with $20,000 worth of debt may agree to pay off the card over time and then may get, say, a flat-screen TV and a motorcycle to make up for his taking on that debt.
“We put everything in a big pot together and overall make sure it’s divided equally,” Melcher says.
Do you live in one of the nine community property states? Your state laws will affect you in the event of an annulment, divorce or death of a spouse. So here are eight things you should know about community property states and credit card debt.
See related: Dividing credit card debt in divorce
8 things to know about community property law and credit card debt
- It may not matter who racked up the debt
- But you don’t have to pay off his or her old debt
- That expensive gift you gave your spouse? It’s not community property
- A move could determine how your debt gets divided
- Your spouse can’t use the card to double-cross you
- Charging gifts for a lover may be a gray area
- The timing of your split matters
- If your spouse dies, you may be liable for their credit card debt
1. It may not matter who racked up the debt.
Debt accrued during a marriage is generally considered marital property, even if you were eating tuna sandwiches to save money while your spouse charged up a huge credit card bill buying designer clothes and high-tech gadgets.
But the frugal spouse in this scenario could make a claim for “marital waste,” says Billie Tarascio, an attorney at Modern Law in Arizona. For example, the saver spouse might argue it isn’t fair for them to pay half the cost of purchases the shopaholic spouse made in secret, Tarascio says.
“Then it would be up to the judge,” she says. “It could really go either way.”
2. But you don’t have to pay off his or her old debt.
On your first date, did your spouse wow you with tales of youthful misadventures in Mozambique without mentioning that gap year was financed on a student credit card?
Fortunately for you, pre-marriage debt belongs to the spouse who charged up the credit card balance, bought the car or took out the student loan. But it can get complicated if one member of a couple racked up credit card debt before the wedding and then continued spending and making payments on the card afterward, Tarascio says.
In that case, it may be “almost impossible” to figure out how much of the debt dates back to the big spender’s single days, she says.
3. That expensive gift you gave your spouse? It’s not community property.
If you pulled out the credit card to buy your spouse a fancy road bike or a pricey diamond necklace as a grand gesture after your last big fight, guess what? That gift probably belongs to your husband or wife 100% while the debt you still owe from purchasing it will likely get divvied up equally between the two of you, Tarascio says.
But that can vary by state. For example, under California law, a gift that is extravagant when compared with the marital standard of living – say, a $100,000 piece of art – may be deemed marital property because it’s too pricey to be a “true gift,” Melcher says.
4. A move could determine how your debt gets divided.
Let’s say you married in Missouri and then moved to Texas just before your marriage got rocky. That move to a community property state may mean that all of your stuff, from the artwork and furniture you loaded onto the moving truck to the debt you racked up as newlyweds, will now be treated as community property if you divorce.
Even moving from one community property state to another can have big ramifications, says Michelle Dellino, managing partner at Dellino Law Group in Washington.
For example, if you married in California and then moved to Washington, you might be surprised when your marital property doesn’t get divided up 50/50 as it would have in California, Dellino says.
In Washington, a spouse who makes less money, say because they stayed home with the kids or have a job that pays less, would probably take a bigger share of the community property pie, she says.
“That’s because they’re probably not going to recover as fast financially from the divorce,” she says.
5. Your spouse can’t use the card to double-cross you.
There is a big exception to the rule that debt accrued during the marriage is split evenly down the middle: fraud. One example: a spouse who knows divorce is coming and starts buying gift cards on credit, then stashing them away secretly for future use, Melcher says.
“Say they go into CVS every week and spend $100, making it look like it’s just household purchases, but they’re buying a $50 gift card every time,” he says. “That would be a fraud on the community.”
6. Charging gifts for a lover may be a gray area.
In a community property state, it’s possible that your spouse could buy their lover a Gucci bag, a Rolex or a jet ski on credit, and you could get stuck with half the bill.
“In California, that’s a bit of a gray area,” Melcher says. The spouse who was cheated on could argue that the spending constitutes fraud or marital waste, but the judge may view it as just a symptom of a failed marriage. “We don’t have a clear rule on that yet,” Melcher says.
In Arizona, this kind of spending would be considered “community waste,” Tarascio says.
She had a client once whose ex-husband-to-be was a pilot with a secret family overseas. After showing the judge how much the husband had spent on the other family over the years, the wife got a “massive, massive reimbursement,” she says.
7. The timing of your split matters.
Once the two of you have parted ways, all future income – and debt – belongs to each person individually. But what counts as splitting up? Is it the day you agree to divorce, the night you start sleeping in the guest room or the moment you sign the divorce papers?
The timing varies by state, so it’s crucial to know when your state deems you officially separated. One day could mean the difference between being on the hook – or not – for a spouse’s big splurge.
No matter where you live, filing a legal separation can help the courts determine which debts were, and were not, incurred during the marriage.
8. If your spouse dies, you may be liable for their credit card debt.
Community property laws don’t just affect you in cases of annulment and divorce, but also apply if your spouse dies. In most states, a creditor can’t go after you to try to collect the credit card debt of your deceased spouse, even if you were an authorized user on the card.
However, in community property states, they can and do. Depending on where you live, you may have to use community property – possibly selling an asset or tapping a savings account – to pay off the balance.
See related: Collaborating with your partner on the finances
Learn your state’s laws
A word to the wise: learn the laws in your state so you know what to expect in the event of a death or divorce.
And in the latter situation, remember to remove your soon-to-be-ex as an authorized user on all of your credit cards, Melcher points out. He’s seen scenarios where a spouse who was accidentally left on as an authorized user charged up their ex’s card after a divorce.
“This is a common double-cross that we’re seeing at the end of relationships, and legally it can be very difficult to do anything about it,” he says.