Where you live impacts debt liability in divorce
Assets and debts are treated differently in community property states
By Sally Herigstad | Published: December 2, 2011
To Her Credit
Dear To Her Credit,
My husband and I lived in California, which is a community property state, for 15 years. He had a lot more debt than I did, and most of it was in his name only.
Recently, we moved to Oregon, which is not a community property state. We're now getting a divorce, and I'm trying to get all his debts assigned to him. I've heard, however, that by community property laws, I could still be liable for his debts even after the divorce and even if my name is not on the accounts. Is that true even if we get a divorce in a noncommunity property state? -- Trudy
You're right to be worried about post-divorce debt. Many ex-spouses think everything is taken care of when a divorce decree assigns debt to one spouse. Then the other ex gets a rude surprise when the creditors come calling!
According to ex-bankruptcy judge and lawyer R. Glen Ayers, "Most divorce decrees allocate liabilities for pre-divorce obligations between the former spouses. So, the husband agrees or is ordered to pay certain credit card obligations and similar debts. The wife may agree or be ordered to pay a car note or some other debts. While the divorce decree may allocate responsibility between the spouses, that decree does not release either spouse from the obligation to the creditor." In other words, while your decree may specify who is to pay what, it does not release either of you from your joint debt obligations if one party falls behind in payments.
In a community property state, everything a husband and wife own and all their debts are considered to belong to both of them unless they show otherwise. Ayers says, "It means that the wheels can come off months or years after the divorce," if either party stops making payments on outstanding debts.
Here's something I didn't know: When a married couple moves from a community state to a noncommunity state (or vice versa), assets and debts are affected differently.
Ayers explains how community property rules work for assets: "First, the state of domicile usually determines debt obligations, while the state where the property is acquired determines ownership interests. So, if I own a car and acquired it while living in a community state, even if it is titled only in my name, and my wife and I then move to a noncommunity state, her interest is determined by the state where the car was acquired; i.e., it remains community and she owns half."
However, debt is another story. Ayers says, "The ability to collect on a community debt would change; if the debt was incurred by a husband in a community state, the community (all assets of husband and wife) would be liable for the debt. When the parties moved to a noncommunity state, only the husband, who incurred the debt (say a note signed by just husband) would be liable and only his interest in property would be vulnerable."
"Next, if the parties divorce, in a noncommunity state, the wife gets her interest as acquired in the community state but a creditor to whom she had no direct liability (she didn't sign the note) would not be able to collect from her," according to Ayers.
It seems the laws work in your favor in this case. It's a good thing you moved from California to Oregon and not the other way around!
As always, be sure to get good legal advice as you go through anything with such far-reaching consequences as a divorce. If at all possible, see if your husband's debts can be paid off with his share of the assets. The best way to be sure you won't be pursued for a debt is still to make sure the debt is paid.
Best of luck in your new independence, and take care of your credit!
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