Debt and Marriage -My Spouse wants to refinance our house to pay off their personal debt

Whether a debt is in your name, your spouse’s name or in both parties’ names, if the debt was incurred after the marriage, it is community debt and both parties can be equally liable for the payment of these debts. If a debt was incurred before the marriage, then the party incurring the debt shall be the sole party to pay this debt.

Often, before a party files for a divorce, they have already contemplated what will be in their best interest from a financial standpoint. They may begin to move money from accounts or attempt to transfer property to another party to avoid division by the courts. We have represented many parties wherein one of the parties has refinanced the community home and used the money to pay off their own personal debt before filing for a divorce. While a refinance may be necessary in your situation, it is best to fully understand how the refinance and payment of debts can affect you and your spouse post-divorce.

What benefits you will depend on who will keep the house in the divorce or if it will be sold. The following are some pros and cons that you need to be aware of:

• Either party will likely be solely responsible for the loan post-divorce and now the loan is higher
• One of the spouse’s debts are being paid off and the other spouse may get stuck paying their own debt and the house loan
• Either party may need to obtain an equity loan or refinance post-divorce and may not be able to do so due to the loss in equity and recent refinance
• If the home is sold, either in the divorce, or later, the amount of equity will be deceased, this leaving less proceeds to each party
• Since the loan has increased and the amount of equity has decreased, if a party must pay a portion of the house’s equity to their spouse, this amount will be lower
• If a spouse is paying debts they incurred before marriage, this is taking money from the community estate to benefit the spouse’s separate debt

If you are in a situation wherein a refinance must be done to pay debts, ensure that the debts being paid are community debts and pay the ones that are in both of your names before paying any debts in the sole name of your spouse. If you are uncertain or do not have control as to what debts are going to be paid and your spouse is attempting to refinance your home, consult with an attorney before you sign any documents.