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Division of Disputed Family Debts

QUESTION

If a family debt (e.g., for college tuition for a child) is established unilaterally by one spouse against the express wishes of the other spouse, how does this affect distribution of property upon divorce?

ANSWER

If a debt is not clearly the separate obligation of one spouse (i.e., because it was incurred prior to the marriage, was inherited, or is separate by valid agreement of the parties) and no economic fault (improper “dissipation” of assets) is involved, any debt incurred prior to the time of the filing of the divorce petition will probably be allocated equally between the parties.

A gift to a third party, especially in the form of debt incurred to supply tuition assistance for a child, is unlikely to be seen by a court as improper dissipation.  A spouse generally has the right to make inter vivos (during life) transfers of marital property to any person, if the transfer is not made for an improper purpose.[1]    Thus, a party is free to gift marital property (including marital credit) to third parties even over the objection of a spouse.[2]

However, transfers of property to third parties after the filing of the dissolution petition violates the automatic restraint on asset transfers unless the transferee can be proven that the disposition  was done either in the “usual course of business” or for the “necessity of life.”[3]  Those terms are not defined by statute or case law.  In our example, it is unlikely a court would find tuition assistance a necessity of life.  The argument could be made that tuition assistance should be considered usual business, perhaps if family agreements existed concerning the payment of tuition, but such intra-family transfers would probably not be found to be a mode of “business.”  In any case, the law requires an accounting for any extraordinary expenditures during the pendency of a divorce, and the party who uses marital funds or credit during this period bears the burden of showing that the disposition was done either in the usual course of business or for the necessity of life.[4]  Thus, any unilateral transfer or taking on of debt after the dissolution petition will probably be considered in violation of the restraint on disposition of property, and the debt will likely be allocated to the party in violation unless other equitable factors strongly disfavor this result.

 

“Family Law Q+A” is meant to entertain and generally inform readers about interesting issues in Colorado family law.  Nothing in this blog post represents legal advice or creates an attorney-client relationship.  The views here do not represent the formal legal opinions of Carrigan Law, LLC.  Furthermore, the law is constantly changing, so any particular discussion of a legal issue may presently be outdated or erroneous.  Readers are directed to contact a Colorado family law attorney regarding the specifics of any case.



[1] A spouse may be found to have dissipated assets when, for example, she fails to  make  lease  payments  when  funds were available, and thus denies the other party the ability to mitigate potential damages.  See In re the Marriage of Jorgenson, 143 P.3d 1169 (Colo.  App.  2006).

[2]  In re Marriage of Schmedeman, 190 P.3d 788 (Colo. App. 2008).

[3]  C.R.S.  14-10-107(4)(b)(I)(a) ; In re Marriage of Meisner, 715 P.2d 1273 (Colo.App.1985).

[4]  In re Meisner, 715 P.2d 1273 (Colo. App. 1985).