Is your spouse incurring a massive amount of debt? Perhaps they’re starting a new business or racking up hospital bills due to an injury or illness. Or maybe they’re simply going off the rails with spending.
People in this scenario often ask the following question: “Could I use a postnup or divorce to escape my spouse’s liability of paying the creditors back?” The answer is: it depends on the timing and details of the agreement. So let’s take a closer look and answer this common question on debt as it relates to prenups, postnups, and divorce in California.
How Prenups Work with Debt
There are many benefits to prenups, but the financial clarity you achieve is paramount.
BEFORE getting married, what conversations about MONEY should you have with your partner?
Use this guide to discuss budgets, assets, debts, goals, joints bank accounts and more.Get the guide
A prenup is a premarital agreement that sets clear parameters regarding financial matters during the marriage, so both parties understand what will happen if they divorce. Typically, the prenup process involves each party disclosing their financial situation, including assets and debts. So if your partner has a ton of debt coming into the marriage, now is the time to protect yourself from becoming liable for this premarital debt.
In California, it’s vital to establish what is separate and community property with a prenup. However, once you’re married, even if your spouse is incurring debt on their own, you are equally liable to pay the creditors back! Why? Keep reading.
How Debt Works After You’re Married
California law says that any debt incurred during your marriage is community debt, meaning it equally belongs to both of you. This applies even when your spouse:
- Opens up a credit card solely in their name
- Incurs bills from medical or law offices
- Owes money from their personal investments
- Opens up a line of credit on their own for a business or real property
Here’s an example to clarify further. Let’s say your husband opens up a credit card in his name only. Your husband has agreed to pay back the creditor on any debt he’s incurred. However, any debt he incurs belongs to you and your husband even if you have a prenup.
This is because the prenup is an agreement between you and your husband — it’s not one that waives liability from the creditor. If your husband passes away, the creditor will come after his estate and any community property you own to pay back his debt! Moreover, the same holds true for postnups as with prenups.
How Postnups Work with Debt
Generally speaking, postnuptial agreements work very similarly to prenups. If you’re in a situation where your spouse is spending frivolously, and you’re looking to use a postnup to financially protect yourself, keep in mind these two critical factors:
- If you and your spouse are attempting to transfer assets by way of a postnuptial agreement, it could be viewed as a fraudulent transfer, and creditors file a lawsuit against both of you.
- A postnup does not free you from third-party creditors collecting on debt that your spouse incurred on their own.
The Benefit of a Prenup or Postnup Regarding Debt
Even though both prenups and postnups cannot act as a sword or a shield in protecting you against creditors, they can do one thing pertaining to debt: both can provide you with indemnification from your spouse. Thus, if you end up paying for your partner’s debts, you have the right to collect that debt from your partner if it’s part of your prenup or postnup.
For example, if your wife piled up $100,000 in medical bills but didn’t pay on time or defaulted, then the creditor may demand that you pay on her behalf. If you pay off the full amount, then you will be owed that $100k by your wife according to the indemnification clauses in your prenup or postnup.
How Divorce Works with Debt
If a prenup or postnup can’t free you from debt liability, can a divorce do the trick? It all depends on the date of separation. Any debt incurred prior to the date of separation is community debt. However, if you and your spouse have established a date of separation, any debt incurred after that debt will be the separate property obligation of the spouse who incurred it.
What do you need to know BEFORE getting a divorce?
Use this step-by-step guide to review custody & visitation, child support, spousal support, assets & debts.Get your free guide
In the example of your wife going to the hospital, you can’t divorce her after the bills start to pile up in hopes of escaping the responsibility of paying for them. You and your wife would have to establish a date of separation and commence divorce proceedings before the bills start pouring in.
It’s understandably stressful to go through a situation where you can’t control your spouse’s spending or debt. Though this post provides some general direction, every case is different and ultimately has a specific set of solutions. If you have questions about how to come up with the right solution for your case or need help navigating prenups, postnups, or divorce, feel free to reach out to me — I’d be happy to help.