Divorce and legal separation as a form of asset protection from your spouse’s creditors

COUPLES have different spending habits and different philosophy in handling marital finances.  Some spouses are conservative in managing their finances and stick with a budget while other spouses do not even set budgets.  What is your exposure if your spouse is a shop-a-holic and runs though his/her credit card like there is no tomorrow?  What if your spouse has a gambling problem and continues to get in debt to finance his/her gambling habits or what if your spouse has child support arrears from a previous relationship?  To add insult to injury, what if you are the primary bread winner in the family working two jobs at the hospital while your spouse philanders around for other prospects.

Generally, the community estate is liable for a debt incurred by either spouse before or during marriage and prior to separation. The liability accrues regardless of which spouse has management and control of the property or whether one or both spouses are parties to the debt or to a judgment for the debt. Family Code § 910(a) and (b).  The community estate are the property and earnings accumulated during the marriage.  In other words,  your entire community property can be liable to creditors of your spouse for debts accumulated even prior to marriage. The community estate liability is not limited to debts incurred for the benefit of the community. Under Family Code § 910, the community may be liable even to debts incurred by one spouse exclusively for his or her personal benefit.

However, where community property is used to satisfy child support arrears arising from a previous marriage at a time where the spouse has separate property to satisfy it, the community has a right of reimbursement from the debtor spouse’s separate property up to the amount of community property used to satisfy the support obligation.

What then is exempt from your spouse’s premarital debt?  A non debtor spouse’s “earnings” during marriage are not liable for debts incurred by the other spouse before marriage under Family Code § 911(a).  This does not include income received from passive investments through.  The non debtor spouse’s earnings cannot be garnished to satisfy the debtor spouse’s pre marital debt as long as it is deposited in a separate account and not comingled with other community property.

In addition, community liability for a debt “incurred during marriage does not include “the period during which the spouses are living separate and apart” before a dissolution or legal separation judgment. Family Code. § 910 (a) and (b). Debts incurred by either spouse after separation are the debtor spouse’s separate obligation, neither chargeable against nor reimbursable from the community estate.  As a result, the community estate is not liable for debts accumulated by your spouse after your date of separation.  So if your spouse continues abusing his/her credit card after the date of separation, the community assets such as savings during the marriage or real property are no longer liable for those debts accumulated after separation.  Those post separation debts are the debtor spouse’s separate debt.

A spouse’s separate property is not liable for the other spouse’s debts, no matter when they were incurred. Family Code. § 913(b)(1).  Therefore, any savings or real estate that you accumulated prior to marriage will not be liable to your spouse’s debt whether your spouse incurred the debt prior, during, or after marriage.

A spouse’s spending and financial irresponsibility is a common cause of marital break ups.  Sometimes, the non debtor spouse has to make the difficult decision of filing for divorce and dissolving the marriage or filing for legal separation as a means of self preservation and to preserve whatever is left of the community estate from total destruction from the debtor spouse.  Obtaining a divorce judgment or a legal separation judgment is also a way to protect at least 50% of the community property from the other spouse’s creditors provided the judgment effects an equal distribution of community property and the parties are actually separated in good faith.   There would be less of an argument from the other spouse’s creditors that the Divorce Judgment or Legal Separation Judgment was obtained solely to avoid satisfying a judgment debt also known as fraudulent transfer.  Making this move is a personal decision that only the non-debtor spouse can make. 

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Please note that this article is not legal advice and is not intended as legal advice.  The article is intended to provide only general, non-specific legal information.  This article is not intended to cover all the issues related to the topic discussed.  The specific facts that apply to your matter may make the outcome different than would be anticipated by you.  This article does create any attorney client relationship between you and the Law Offices of Kenneth U. Reyes, P.C.  This article is not a solicitation.

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Attorney Kenneth Ursua Reyes is a Certified Family Law Specialist.  He was President of the Philippine American Bar Association.  He is a member of both the Family law section and Immigration law section of the Los Angeles County Bar Association.  He has extensive CPA experience prior to law practice. LAW OFFICES OF KENNETH REYES, P.C. is located at 3699 Wilshire Blvd., Suite 747, Los Angeles, CA, 90010.  Tel. (213) 388-1611 or e-mail kureyeslaw@gmail.com or visit our website at Kenreyeslaw.com.

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Atty. Kenneth Reyes
Atty. Kenneth Reyes

Attorney Kenneth Ursua Reyes is a Certified Family Law Specialist. He was President of the Philippine American Bar Association. He is a member of both the Family law section and Immigration law section of the Los Angeles County Bar Association. He has extensive CPA experience prior to law practice. LAW OFFICES OF KENNETH REYES, P.C. is located at 3699 Wilshire Blvd., Suite 747, Los Angeles, CA, 90010. Tel. (213) 388-1611 or e-mail kureyeslaw@gmail.com or visit our website at Kenreyeslaw.com.

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