In the absence of a premarital agreement, most debts incurred during marriage in Arizona are “community” debts, meaning the debts are owed by both the husband and the wife. It makes no difference that only one spouse signed for the debt. Under A.R.S. Section 25-214.B., with limited exceptions outlined in subsection C, either spouse alone has the power to “bind the community.” In other words, BOTH spouses are liable under Arizona law for debts incurred by EITHER during the marriage.
In a divorce decree, the judge allocates the responsibility for the community debts between the husband and the wife. For example, suppose Husband and Wife have the following three credit card debts between them, all incurred during their marriage: A Visa card in both names with a $6,000 balance; an American Express card in Husband’s name with a $4,000 balance; and a Discover card in both names with a $2,000 balance. In the divorce decree, the judge orders the Wife to pay the Visa and the Husband to pay the other two debts, thereby ordering each party to pay a total of $6,000 in debt.
After the divorce, Wife makes extra payments on the Visa card and gets it paid off in one year. Husband only makes the minimum payments on the AmEx and the Discover cards allocated to him, and one year after the divorce, the balances on the cards allocated to Husband still total $5,700.00. Then Husband stops making his credit card payments altogether. The creditors pursue collection of the debts from both Husband and Wife.
Wife objects to the creditors, telling them she doesn’t owe the AmEx and Discover debts–that Husband was ordered to pay them in the divorce. Is Wife correct? Does the divorce decree legally protect her from liability on the AmEx and Discover debts? NO! The creditors were not parties to the divorce decree, and the judge in the divorce case had no authority to take away the creditors’ legal right to pursue collection from both Husband and Wife. The divorce decree debt allocation is no defense to the creditors’ collection efforts against Wife.
In fact, until Wife actually pays some or all of the debts Husband was ordered to pay in the divorce decree, Wife has virtually no recourse. In our example above, suppose Wife pays off AmEx and Discover to get the creditors off her back. Even after Wife pays the AmEx and Discover debts, her only remedy is to pursue collection against Husband. Wife may take the Husband back to family court and obtain a judgment against him for the amounts she paid to the creditors Husband was ordered to pay, but if Husband is truly a deadbeat, how collectible will Wife’s judgment against him be?
In practice, it is sometimes impossible to avoid situations like the above example, but there are some steps I can take to try to reduce the likelihood that the other party’s debts will come back on my client. For one, I try to obtain settlements that allocate to my client only joint debts or debts in my client’s sole name. I never want my client to agree to pay debts in the other party’s sole name. If a debt incurred during the marriage does not appear on my client’s credit report (i.e., the debt was incurred by the other party alone), there is a good possibility that if the other party defaults on that debt, the creditor will never realize that the debt was incurred during a marriage and that there may be an ex-spouse out there (my client) who is also liable for the debt. Often the creditor simply checks to see who signed the credit app and pursues only that debtor.
Another option is to pay off debts using sale proceeds from a marital asset. For example, if the parties own a home together that is being sold as part of the divorce, the parties may agree to use the house sale proceeds to pay off all credit card debt first and then divide up between them the remaining house sale proceeds.
Finally, if the parties have good credit, they may be able to each open new credit cards after the divorce case is filed and served and then balance-transfer their respective portion of the marital debt (the debt incurred during the marriage) to their separate-debt credit cards (the cards opened after the date of service of the divorce papers).
Copyright © 2013 by Scoresby Family Law – J. Kyle Scoresby, P.C. All rights reserved.
You can also watch my video on debt allocation and creditor’s rights below.
