Community Property States and Spousal Debt
Only nine U.S. states follow community property laws. Those states are as follows:
- Arizona
- California
- Idaho
- Louisiana
- Michigan
- Nevada
- New Mexico
- Texas
- Washington
Because community property laws exist primarily to make the division of property in a divorce a simpler and fairer process, this statutes generally applied to assets rather than to debts. Community property regulations may apply only to certain debts or only under state-specific circumstances. Don't assume that community property laws are identical in every state. They're not. We're going to use California as an example here because California's spousal debt statutes are clear – if your spouse owes it, you owe it.
Do I Owe My Spouse's Debts?
Division of debt typically comes up only in legal separation and divorce proceedings. When a creditor or collection agency decides to sue, however, who they can sue depends upon the community property laws in the debtor's state. Unfortunately, knowledge of the debt is not a prerequisite to payment. In other words, you're legally responsible for paying off the debt whether you know about it or not. Lets look at the following example:
Suing the Spouse and Not the Debtor
In a state that applies its community property statutes to debt as well as assets, a collection agency has the option to either pursue the debtor directly or pursue his spouse. Most companies will pursue payment from the debtor first as a matter of policy. If the debtor lacks the assets to pay or is considered "judgment proof," bill collectors have the option to pursue the spouse. Lets look at an example of this in action:
Lisa and Joe live in California. Joe lost his job and currently receives unemployment. He has not found work yet. Although Lisa has a stable nursing job, the two are struggling financially and Joe defaults on his credit card. He knows that the credit card company is unlikely to sue him since he does not have wages the company can seize. Because the account is in Joe's name only, he assumes his wife's wages are exempt from garnishment. To the couple's surprise, the credit card company sues Lisa. Even though her name is not on the account, she is still liable for the debt under community-property law.
Domestic Partnerships and Community Property Law
California recognizes domestic partnerships in addition to traditional marriages. This gives many of the same benefits (insurance, inheritance rights, etc.) to those in a domestic partnership that married couples receive. Unfortunately, the downsides of marriage also apply.
Domestic partners are also liable for spousal debts under community property law. Granted, its not phrased that way because domestic partnerships are not classified as marriage (although I firmly believe that this can and should change. It's only a matter of time). Thus, a domestic partner can also be held responsible for debts that were incurred by his partner.
The Exception to Community Property Debt Responsibility
The exception to the community property rule that applies in all community property states is that an individual cannot be held liable for his spouse or domestic partner's debts if those debts were incurred before the couple entered into their union. For example, if your spouse has outstanding student loans that were never paid and the two of you married after college, you aren't liable for those defaulted loans – regardless of whether or not you live in a community property state.
Community Property States and Defaulted Spousal Debt
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Published :
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