In an era in which divorce occurs in over half of the marriages and each spouse can engage in careers which can result in extensive debts, the issue of when does a spouse face liability to third parties for the debts of a husband or wife can become critical. Typically, a husband or wife either fails in business or in an investment and faces aggressive creditors who quickly exhaust the assets owned by that husband or wife. When can the creditors then turn and seek to enforce a judgment existing against one spouse against assets of the other spouse? That is the subject of this article.
The reader should first review the articles on Enforcement of Judgments and Prenuptial Agreements before reading further.
Community Property and Separate Property and the Basic Rule:
In California property owned by an individual falls under one of two categories:
1. Community Property: All property and income acquired during marriage and before separation, other than by gift or inheritance, is presumptively community property. [Ca Fam § 760, 771(a)]
Note: Property acquired during marriage by "gift, bequest, devise, or descent" (i.e., inter vivos or testamentary gift or intestate succession) is the acquiring spouse's separate property. [Ca Const. Art. I § 21; Ca Fam § 770(a)(2)]
2. Separate Property: Property acquired before marriage as well as property obtained during marriage that can be traced to a premarital acquisition. [Ca Fam § 770(a)(1) & (3)]
Since California is a community property state, the law applies that the community estate shared between both individuals is liable for a debt incurred by either spouse during the marriage. All community property shared equally between husband and wife can be held liable for repaying the debts of one spouse.
However, it must be noted that separate property of either spouse will not be held liable for repaying the other’s debts unless these debts were incurred to secure necessities of life (e.g. food, shelter, etc.
The following statutes further describe the basic law:
The community estate can be held liable for any debt incurred by either spouse prior to or during the course of the marriage, regardless of whether one or both spouses benefit from the debt. [Ca Fam §910(a)] This does not include the earnings of the nondebtor spouse with regards to debts accumulated by the debtor spouse from before marriage. [C.C. 5120.110(a)]
The separate property of a married person (inheritances included) is not liable for a spouse’s debt incurred before or during the marriage. [Ca Fam §910(b)(1)]] The exception to this rule occurs when the debts incurred by one spouse during marriage are incurred for the purpose of securing necessities of life, as the spouses have a duty to support one another. Necessities of life in this context are defined as: food, shelter, clothing, court fees, and attorney fees. In such an event, the spouse of the person who takes on the debt is also personally liable for this particular debt. The nondebtor spouse’s separate property may used to repay the debt of their spouse in such a situation. [Ca Fam §914(a)(1), (b)]]
For example, in Robertson v. Willis, the court affirmed that the community property of the defendant and her husband could be used as payment of defendant’s husband’s debt to plaintiff. However, the defendant wife was not personally liable for the debt and so her separate property could not be used as payment. [Robertson v. Willis, 77 Cal. App. 3d 358 (Cal. Ct. App. 1978)]
Pre and Post-Nuptial Agreement:
According to the CA Family Code, “The property rights of husband and wife prescribed by statue may be altered by a premarital agreement or other martial property agreement” [Ca Fam Code part 5, Chapter 1, §1500]. A married couple may enter into a postnuptial agreement that outlines how they will divide the property they own in the event that the marriage results in divorce in the future. Without a pre-nuptial or post-nuptial agreement, marriages entered into in California divide assets and income 50-50 in the event of divorce.
In California, it is not required to give notice to creditors upon the creation of a post-nuptial agreement. However, fraudulent conveyance statues may be applied in the event that it is discovered that the post-nuptial agreement was created in attempts to hinder or avoid collection of debt. [IRM 25.18.4.11].
Conclusion:
It is readily apparent that decisions of a couple as to whether to enter into a marital agreement may have a significant effect on whether debts of one spouse can affect the separate property of another. Realizing that, banks and other financial institutions often require both spouses to execute notes and other obligations so that both spouses…and their separate property…are at risk in the event of default. See our article on guaranty.
What some couples fail to realize when negotiating a prenuptial or post nuptial agreement is that the subject matter does not only pertain to possible dissolution of marriage and division of property but may drastically alter the ability of third parties to obtain collection of judgments. Especially when one spouse is involved in a high risk business venture, the couple should carefully consider whether isolating the separate property of each other and enlarging its scope may make sense.
That said, there are many other issues that arise from the decision as to whether to minimize or eliminate community property and these decisions range from tax considerations to the possible effect of a dissolution of marriage. Good accounting and legal advice is required before this important decision is made by any far seeing couple.