Only nine states in the United States are considered Community Property States with Alaska (being number 10) having an option for couples to select community property. If you live in the any of the other 40 states, this doesn’t apply to you. A quick definition of community property: property acquired during a marriage is joint property or owned by both spouses regardless if only one spouse’s name is on the item, deed, bill, etc. During a divorce/death/annulment the property is divided.
But first, the nine community property states:
- New Mexico
If you live in the Southwest, this applies to you. Oh, and Wisconsin for some reason.
Why is knowledge of community property important? For separation or the death of a spouse. Though each state handles community property differently, during a divorce/death any property or item acquired during the marriage is seen as being owned by both spouses. Some examples include:
- Property purchased during the marriage. Even if only one spouse’s name is on the deed or title of the property, if both spouses contributed their earnings toward the property, community property states will treat it as both spouses owning the house, condo, building, car, etc. (An exemption would be property purchased or inherited before the marriage.)
- Debt incurred during a marriage. This one can be a little trickier, but the bottom line is that if one spouse racks up a bunch of debt and can claim that it was for “living expenses” for both people, that debt is joint property. It doesn’t matter if the debt was only in one person’s name, both are responsible. If one spouse goes out and purchases anything that can be seen as “joint” property, be that a TV or car, the other spouse is just as responsible for that property and shares in the debt.
- Bank accounts, stocks, bonds, etc. Though financial accounts can be a bit of a gray area, if both spouses contributed to any financial account or used community property (like the sale of a home or item) to contribute to an account, that account is jointly owned. Using a specific example from the NOLO site, if one spouse has a bank account with $5,000 in it before the marriage, but then the account becomes a joint account that both spouses contribute to, that original $5,000 now becomes joint property because it got mixed in with community property that can’t clearly be identified.
To clear up any confusion in my examples above, NOLO states it plain and simply:
“Generally, in community property states, money earned by either spouse during marriage and all property bought with those earnings are considered community property that is owned equally by husband and wife. Likewise, debts incurred during marriage are generally debts of the couple.”
As unpleasant as the topic of divorce is, knowing if you live in a community property state is important to make sure you take precautions to protect your assets and credit. If you and your spouse are talking about separation or divorce, getting all the finances out on the table is a good first step. Knowing how much debt you owe jointly and what property you own, both physical (immovable) and movable (bank accounts, etc.) will ease a bit of the tension when it comes to finances and property. I’ve read stories of one spouse purposely racking up a ton of debt to make the other spouse “suffer” the consequences, but that just hurts both parties involved.
At the end of it all, who wants to be getting over hurt feelings from a relationship and in serious debt!? Clearly the answer to this would be, “Hey, don’t get divorced!” But realistically 50% of marriages fail, so it’s naive to think everyone lives the happily-ever-after Cinderella story.
My advice: Be prepared, be educated, and use your noggin.
Have you known anyone who’s gotten divorced in a community property state? Did it work out to their advantage or disadvantage?