Who Pays Secret Debt in Divorce?

Dear To Her Credit,

I live in Louisiana, which is a community property state. Upon divorce, I learned that my spouse had opened up numerous credit cards in his name only without my knowledge, and had the payment coupon going to his mother's house so I wouldn't be aware he had the cards. I did not know these cards existed, and I definitely didn't have access to them. I classify this as flat-out deception. He has borrowed over $70,000 on those cards and has nothing to show for it. I assure you those funds were not used for the benefit of both of us. We didn't go on any lavish vacations, the house wasn't remodeled, he didn't pay off any bills. I don't know what he used those funds for. Further, we had joint credit cards with $0 balances and could borrow well over $200,000 if we chose. The reason he didn't use those cards was because I would know about it.

He was also secretly taking money out of his 401(k) plan without my knowledge. The only way I knew that was happening was when I started receiving letters from the IRS stating that I didn't report all my income and owed additional taxes.

We both have good jobs with a combined gross monthly income of $14,000, with bills only totaling around $4,000 per month. There was no need to borrow that type of money on credit cards.

Now he is taking me to court. When we sold our house, we profited $70,000 from the sale. That money went into a trust account and both lawyers agreed that money would stay there until all other issues are resolved.  Of course, we can't resolve the issues ourselves so we have to go to court and let a judge make the decisions.  He wants the court to rule in his favor and use those funds to pay off his debt since he considers his debt community property. If I could prove to the court that those borrowed funds were not used for the benefit of the community and were acquired without my knowledge, would I still be responsible for half of that debt?  

-Sarah

Dear Sarah,

The worst-case scenario is not that you could be responsible for half of the debt. If he doesn't pay up, the creditors could pursue you for all of the debt that was run up during the course of your marriage, plus you could pay the tax on the 401(k) funds if he doesn't. That's why it's so important for you to get this sorted out immediately!

There's a lot of confusion regarding community property and community debt. In principle, the debts and assets from the time of the marriage are shared by the marriage "community."

"The contract of marriage welds them together in debt," says Robert Siciliano, McAfee consultant and identity theft expert in Boston. "It's unfortunate. We see situations like this all the time, when a spouse will ring up all kinds of debt and the other spouse is responsible for it. Sometimes children do it to their parents."

Your case seems especially like dirty dealing because he was sending the bills to his mother's house so you wouldn't see them. Taking out retirement funds and sticking you with the tax bill is low, too. "That's generally how deception works," Siciliano says. "Deception isn't pretty."

However, even though you could be liable for the $70,000 in debt, the laws don't make them automatically yours. Your ex can't "give" them to you, and if you can prove your side of the story, the court isn't likely to use your joint funds held in escrow to pay them off, either. "That isn't going to fly in divorce court," says San Francisco bankruptcy attorney Jeena Cho. "That sounds like fraud."

"Creditors generally pursue whoever is named on the debt," adds Cho. "I hope it's all in (your ex's) name. If it's not, she can ask that specific provision be put in marital settlement agreement where he will pay off the debt." The best scenario would be if the courts used his share of the assets to pay off the debt so they are not left dangling. Creditors are not bound by divorce court settlements, however. If they pursue you, you'll have to defend yourself again to them or notify the courts that your ex is in default of the agreement.

The tax on retirement fund withdrawals is another matter. You shouldn't pay a dime of it -- and you won't have to if you obtain relief under the Innocent Spouse provisions with the IRS. The IRS has a simple online questionnaire to help you decide if you qualify. You would then file IRS Form 8857, Request for Innocent Spouse Relief.

Cho also has some advice for you: "Go out and get professional help! She needs to talk to a CPA and divorce attorney ASAP. This is not the time to exercise self-help."

If justice is served, you should soon have your share of the marital assets and be free of your ex's secret debts. Best of luck in your new, independent life, and take care of your credit!