Even under the best circumstances, untangling credit card debt during a divorce is an arduous process. And if you live in one of the country's nine community property states, that process can get particularly tricky.
If you live in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin (Alaska is an opt-in community property state), here are the most important things you need to know about how community property laws can impact your shared debt.
The burden of shared responsibility
When it comes to dividing property and debt during a divorce, most states follow what are known as common law rules. In a common law state, each spouse is generally liable for debts they accrued individually. So, if the husband signed up for a credit card in his name, he's technically the one responsible for paying the balance. Conversely, if a couple opened a joint credit card account in both their names, both spouses are liable for paying off any balances.
“There are a lot of possible exceptions to this, of course,” says Pennsylvania-based family attorney Tom Petrelli. “Even in common law states, the court can hold both people accountable for [one spouse's] credit card debt, depending on how the divorce works out.”
Community property states, on the other hand, consider most debt (with some exceptions) incurred by either spouse during the marriage to be “community debt,” which means both spouses are automatically on the financial hook, no matter whose name a debt is in.
“Sorting through debt during a divorce is a huge issue that most couples aren't prepared for,” Petrelli says. “In most of the cases I see, the primary reason for the divorce is financial, and each spouse wants the other to be responsible for the debt. But, in the end, no one ever comes out entirely happy, especially in community property states.”
An important exception
Not all debt is created equal, and even in community property states, there are certain exceptions to the rule of thumb.
“It really comes down to whether or not the debt was used to benefit the marriage,” says Howard Dvorkin, author of “Credit Hell: How to Dig Out of Debt.” “If it was, then both parties will share responsibility. But if one spouse used the credit card to make purchases that didn't benefit the marriage as a whole, there's a chance that it won't be considered shared debt.”
To be sure, this is a gray area that will differ from couple to couple, but Petrelli says there are a few obvious circumstances that would lead to this exception.
“Maybe the husband was using his credit card to fuel an alcohol or gambling addiction. Or maybe he was buying jewelry and vacations for his mistress. If there's a paper trail and the wife can show the court that these things were going on, she's not going to be on the hook for that stuff,” Petrelli says.
The court versus the card company
According to David Pisarra, a California-based divorce attorney, divorcing couples need to be aware of one very important fact: Credit card issuers generally don't care if you live in a community property state.
“There are two different perspectives at play,” Pisarra says. “There's the court's perspective of who is responsible for the debt, and then there's the credit card company's perspective. And a lot of times these two perspectives are not the same.”
According to Pisarra, a family court in a community property state will most likely rule that both partners are equally responsible for any incurred credit card debt. For instance, if there's a $20,000 balance on a card held in the husband's name, a judge may rule that each individual is responsible for $10,000.
“But guess what? The credit card company doesn't care about that ruling,” Pisarra says. “If the card is the husband's name, he's the one they are going to hold accountable. If the wife suddenly stops paying her half, the credit card company is going to come after the husband. And it won't matter that he has an order from a judge or that he lives in a community property state. He signed the contract, he's on the hook.”
According to Laura Ruvolo Lipp, a New Jersey-based family attorney, this problem arises more frequently than most people realize.
“I see it all the time, where one person will basically thumb his or her nose at a court order, leaving the other person financially stranded,” Lipp says. “But it doesn't matter to the card company. When the time comes to collect, they will reach out to whoever's name is on the card, whether you live in a community property state or not.”
If this happens, Lipps says the only recourse is to file a post-judgment motion after the divorce, which attempts to enforce the original ruling. But that can get expensive.
“I represented a woman who had $3,000 in shared credit card debt with her ex. He was ordered to pay half, but just decided not to. And I told her we could keep fighting to try and force him to pay, but we would have spent more money doing that than she owed to the credit card company,” says Lipp. “It's sad and unfair, but it's reality.”
Preemption and prevention
Married couples living in a community property state should have a frank and honest conversation about how to share debt and how to handle it in the event of a divorce.
“It's a difficult but very necessary conversation to have,” says Los Angeles-based divorce coach and mediator Arianna Jeret. “Opening a credit card together is kind of like having a baby. You and your spouse will be wedded to this thing for years and years, so you better be prepared to take care of it together, no matter what.”
Another way to make sure there won't be a dispute over debt is to draft a prenuptial agreement, which would override community property laws. The agreement should outline very specifically how shared debt will be divided in the event of a divorce.
Another way to protect yourself is to spread out the debt, says Wayne “The Credit Guy” Sanford, founder of New Start Financial Corp. in Texas.
“Don't let one partner accrue the majority of the debt,” he says. “Not only does that lead to resentment in the marriage, it also makes things very contentious if you get divorced.”
A good way to do this, says Pisarra, is to make sure all credit cards are kept in both spouse's names. That way, if one person neglects to pay the half he or she owes after a divorce, the credit card issuer won't be turning to just one person for payment.
“It really doesn't matter if you live in a community property state or not, because all that matters to the credit card company is who signed the contract,” Pisarra says. “And trying to convince a credit card company that you aren't responsible for debt in your name is like going to the ocean and telling the waves to stop coming to shore. No matter what you do, those waves still come in, and once you're in the clutches of a credit card company you are sunk.”
Because each state will have its own community property laws, be sure to contact an attorney in your state who can provide advice on responsibility for and division of debt.