Dealing with Marital Debts in Divorce or Separation

Debts incurred after marriage are presumed to be community obligations. If the spouse creating the debt intended to benefit the community, the debt is a community obligation.

Because the foundation of community property is a valid marriage, this discussion is applicable only to married couples in Arizona. Single persons cannot own community property, nor can they incur debts for which a community may be liable.

The general rule is that either spouse may contract debts and otherwise act for the benefit of the community. However, both spouses must join in certain transactions for the acquisi­tion, disposition, or encumbrance of an interest in real prop­erty, and in transactions involving guaranty, indemnity, or suretyship.

Illustration #1: The husband applies for a loan that will be secured by a deed of trust on the married couple’s house. Because the transaction involves an encumbrance of an interest in real estate, the joinder of both spouses in the trans­action is required. This means that the transaction cannot be completed without the wife’s signature.

In an action on a community debt or obligation, the spouses must be sued jointly. The debt or obligation will be satisfied first from the community property, and second, from the separate property of the spouse contracting the debt or obligation.

Illustration #2: The wife, while driving to play golf, negli­gently injures a pedestrian. The injured pedestrian can sue both spouses and recover from community property and, if that is inadequate, from the wife’s separate property. (Of course, if the couple in this illustration is properly insured, their insurance company will pay damages to the pedestrian injured by the wife’s careless driving).

If both spouses are not named as defendants in a lawsuit arising out of a community obligation, such as in the above illustration, recovery may be had only against the separate property of the spouse who committed the negligent act.

Some additional rules:

The separate property of a spouse is not liable for the separate debts or obligations of the other spouse, absent agreement of the property owner to the con­trary.

The community property is liable for a spouse’s debts incurred outside Arizona during the marriage that would have been community debts if incurred in this state.

The community property is liable for the premarital separate debts of a spouse, incurred after Septem­ber 1, 1973, but only to the extent of the value of that spouse’s contribution to the community that would have been his separate property if single.

Debts or liabilities incurred before marriage are classified as separate, and collectible out of the separate property of the person who incurred them. However, as noted in Additional Rule #3 above, a creditor may also reach the contribution of that spouse to the community property with respect to pre­marital debts or liabilities incurred after September 1, 1973, in order to avoid so-called marital bankruptcy (avoidance of the premarital debt by the act of marriage).

Child Support: In a case involving child support, the court ruled that the obligation of the husband for the support of his child from a prior marriage was a premarital obligation. Accordingly, the wages of his second wife could not be reached to satisfy the child support obligation.

As noted on community property, the community is dissolved upon the happening of one of these three events:

1. service of a petition for dissolution of marriage, legal separation, or annulment, if the petition results in a decree;
2. the death of one spouse; or
3. the execution of a separation agree­ment by the spouses. Once the community is dissolved, the community property is not liable for subsequent debts or obli­gations incurred by either spouse. In the case of divorce or legal separation, the community property ceases to be liable for the individual debts of either spouse upon service of process in that action (so long as the petition results in a decree), despite the existence of a valid mar­riage.

In an action for dissolution of marriage or legal separation, the court has the power to allocate the community debts and obligations among the husband and the wife. Community debts not allo­cated by the court remain the joint obligation of the parties. However, any allocation of debts by the court is not binding on the parties’ creditors; to satisfy a community debt, a creditor may pursue community property assigned to either spouse.

Illustration #3: The husband and wife have a credit card balance at the time of their divorce. The charges on the card were incurred during their marriage. The court orders the husband to pay the debt. Instead of paying the debt as ordered, the husband files bankruptcy. The credit card company can sue the wife to collect the credit card balance, and she will be unable to pursue the debt against her former husband because he is in bankruptcy.

A married person who understands the law governing community debts will be better able to build and maintain good credit. Because credit is so important, every effort should be made to protect it.