Wedding bells ring…and sometimes they die out. According to the American Psychological Association, 90% of people in Western cultures get married by the age of fifty. However, 40%-50% of all first marriages end in divorce. For many Americans, divorce and debt become two unfortunate realities.
Apart from the emotional breakup and disappointment that accompany divorce, splitting up debt and assets can be confusing and stressful during a divorce. Learn more about how debt and other potential expenses are divided in a divorce.
Sometimes when it rains, it pours. If getting divorced weren’t difficult enough, the financial repercussions associated with it can be upsetting in an entirely separate way. While the splitting of assets is often a primary focus, the answer to the question of how debt is divided in divorce is an important one with answers that can often get messy and complicated.
A divorce decree will divide a couple’s assets and debts – and even with fairness and equality ideally pursued – sometimes assets are unevenly distributed, and this can also result in a skewed allocation of divorce debt, as well.
Often, legal liability for divorce debt will depend upon the state in which the divorced spouses live. In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin), debt accumulated during the marriage won’t necessarily be assigned to the spouse who created the debt – instead, both spouses may be held equally responsible for the debt.
However, in equitable distribution states, the court assigns responsibility to the specific spouse who incurred the debt. Additionally, prenuptial agreements will also play a role in how debt is divided in a divorce.
Regardless of how a court splits divorce debt between spouses, creditors expect to be paid, with the name or names associated on a credit card account or loan contract taking precedence over a divorce decree. This can become problematic when one spouse is ordered to make payments on jointly held debt or debt held in the other spouse’s name.
How is Debt Divided in Divorce?
An overriding question for many people headed toward divorce is, “Am I responsible for my spouse’s debt if we divorce?” The manner in which debt is divided in a divorce will often depend upon the type of debt involved. For example, with credit card debt in divorce, if the debt is held in one spouse’s name, it will usually only remain the responsibility of that particular spouse.
However, for joint credit card debt – since most states consider marital debt to be any debt accumulated during the marriage – it becomes likely that both spouses will be held responsible, regardless of who was making payments on the account throughout the marriage. When mortgage debt is involved, things can get messy. Mortgage debt is usually assigned to the spouse who earns more or has been awarded custody of any children – and that spouse is then often placed in the position of “buying out” the other spouse’s equity in the home.
Often when both spouse’s names are included in the mortgage contract, the best solution is to simply sell the house and split the money raised through the sale. It may also be necessary to work out a temporary arrangement of how much each spouse should contribute toward paying the mortgage until any house sale, so as to protect the credit profiles of both spouses.
Splitting debt in divorce can also get complicated when it comes to auto loans. It is common for both spouse’s names to be on an auto loan contract – but if only one spouse is made responsible for paying the debt following a divorce and allows payments to lapse, both spouses’ credit profiles are impacted in the event of late payments or default.
Appropriate solutions can be to approach the auto lien holder and insist on automatic payments be withdrawn from the financially responsible spouse’s bank account, or for the responsible spouse to refinance the auto debt. Turning to medical debt, in community property states, both spouses are responsible for paying their partner’s medical debts.
In equitable distribution states, however, the court will consider whether the couple was living together when the debt was incurred, as well as any potential impact that sharing this divorce debt would have on any children in the family.
Divorce Debt and Bankruptcy
What happens when a spouse declares bankruptcy following a divorce? Unfortunately for the other spouse, when a spouse files for bankruptcy to eliminate any joint debts, the full debt is not eliminated in bankruptcy court.
Bankruptcy only wipes out the filing spouse’s liability for the debt. Therefore, it is possible that if the other spouse does not file for bankruptcy as well, that creditors can pursue the full amount of any debt that was held jointly in both spouse’s names. This is the reality.
Additionally, the spouse who does not file for bankruptcy must carefully examine his or her credit reports to make certain that the filing spouse’s bankruptcy does not mistakenly appear on the other spouse’s credit report as well.
Divorce and Debt
There’s no question about it – when addressing divorce and debt, it’s important to be thorough and meticulous. Therefore, once divorce becomes inevitable, it is wise to close out all joint credit card accounts to prevent one spouse from performing a balance transfer onto the card or simply running up charges for which both spouses can later be held responsible. Ideally, the best strategy is to pay off all debt (or as much as possible) prior to a divorce. Try to close all joint accounts ahead of time, and transfer balances into each spouse’s individual credit card accounts.
Look to sell property or refinance the mortgage into one name, along with any auto loans and other loans jointly held and put them into only one spouse’s name prior to divorce. This way, after the divorce, the possibility that one of the spouses fails to pay their assigned share of jointly held divorce debt gets minimized, and both spouses can move ahead separately in their own lives, both personally and financially.
About the Author: Steven Brachman
Steven Brachman is the lead content provider for UnitedSettlement.com. A graduate of the University of Michigan with a B.A. in Economics, Steven spent several years as a registered representative in the securities industry before moving on to equity research and trading. He is also an experienced test-prep professional and admissions consultant to aspiring graduate business school students. In his spare time, Steven enjoys writing, reading, travel, music and fantasy sports.
Gabriel Gorelik paves the way for customer service and operations at United Settlement. He is passionate about numbers and holds a strong belief in helping anyone with their debt. Before United Settlement, Gabriel received his BS in Finance & Economics from Brooklyn College. After graduation, Gabriel went on to build his first financial services company where he managed thousands of accounts for business and consumer clients. He understands the importance of client satisfaction, professionalism, and exceeding expectations.