How Are Loan Proceeds Divided Upon Divorce?

Basic Community Property Principles

California uses the community property system of dividing marital assets and liabilities upon divorce. When a couple gets divorced, they have an equal interest in all assets and liabilities that are considered part of the community estate. All assets and liabilities acquired during the marriage qualify as community assets and liabilities unless evidence clearly indicates that they are a party’s separate assets or liabilities. Property and debts acquired before marriage or after the parties date of separation constitute separate property.

Importantly, all assets and liabilities are presumed to be community assets and liabilities. As a result, the party claiming a separate interest in assets or liabilities has the burden of proving the separate character of those assets or liabilities.

Separate Proceeds and The Lender Intent Rule

The community property presumption also applies to proceeds acquired under a loan. To overcome the community property presumption regarding loan proceeds, a party may present evidence that the lender intended to rely on the party’s separate property regarding repayment.

So, how does one prove the lender’s intent in making a loan? Testimony from the lender or their qualified agent speaking directly to the issue of intent is an effective way to demonstrate intent. However, the vast majority of commercial lenders are banking entities. As a result, direct testimony of the lender’s intent might be easier said than done. Identifying someone who was authorized to make the loan can be difficult, especially if they made the loan several years before the parties’ divorce proceedings.

When finding direct evidence of lender intent is otherwise impractical, a bank expert could deduce the lender’s intent, based on their knowledge of industry-specific standards for authorizing loans at the time or specific lending policies of the financial institution that originated the loan.

Given the difficulty of demonstrating lender intent, people trying to claim loan proceeds as their separate property should supplement evidence of lender intent with other evidence, including:

  • The size of the party’s separate estate relative to the community estate
  • Loan documents containing the party’s signature without their spouse’s signature
  • Conditions of performance expressed under the loan agreement
  • The character of any collateral used to secure the loan

Contact Hanson, Gorian, Bradford & Hanich Online

Are you in the middle of a tough divorce involving complicated financial issues related to property division or family support payments? If so, you can definitely benefit from hiring a licensed attorney to represent your interests and advise you on pertinent legal issues. At Hanson, Gorian, Bradford & Hanich, our attorneys are committed to advocating for you and your family’s best interests.

Call our office at (951) 506-6654 to schedule a consultation about your case with one of our attorneys, or complete our online request form today.


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