In most divorces, debt is a fact of life. According to Experian, the average married consumer has tens of thousands of dollars more debt than the national average. Given the role financial stress plays in divorce, the average divorcing couple may have even more debt than that. As such, while the ideal is certainly to go into divorce debt-free, that’s just not feasible for many couples.
When a couple separates or divorces, both their property and their debt must be divided. The way debt division plays out in divorce – and the way it interacts with your creditors – can have a significant impact on your future. If you’re considering divorce, you need to be prepared.
Classifying marital or community debt and separate debt
Every state has its own laws with respect to divorce and debt, but the most important piece is whether the debt was incurred prior to the marriage or during the marriage. As a rule, debts in one spouse’s name that arose before the date of marriage or after the date of separation are considered “separate debt,” which means they are generally not subject to division during divorce.
Conversely, debts incurred during the marriage are usually both spouses’ responsibility, called “marital debt” in equitable distribution states and “community debt” in community property states. In addition, joint debts acquired prior to the marriage – for instance, if the spouses opened a joint credit card before they were married – remain both spouses’ responsibility.
There are certain types of debt that are usually considered separate even if they are incurred during the marriage. Again, the rules vary from state to state, but the most common exceptions to this rule are:
- Gambling debts acquired by one spouse.
- Certain types of student loans.
- Anything spent on an extramarital affair by an unfaithful spouse.
Unless one of those exceptions applies, though, the key is when the debt was incurred, not which spouse’s name is on it. If one spouse opened a credit card in their own name during the marriage, the balance on that card is usually considered marital or community debt, even though the other spouse’s name isn’t on the card. Under some circumstances, this can make a spouse jointly responsible for a debt they didn’t even know about.
Of course, it’s not always possible to cleanly divide debt between “before marriage” and “during marriage.” If one spouse opened a credit card before the marriage, but accrued most of the current balance during the marriage, is that shared debt or separate debt? That depends on state law and often a judge’s decision.
Debt division in community property states
Again, in a community property state, debts incurred during the marriage are considered community debt. In general, this means the total debt is divided in half between the divorcing spouses along with the community property.
However, if the value of community debt is greater than the value of community property, then depending on the state, the law may allow the judge some leeway to bypass the equal division of debt. In these circumstances, the judge may assign more debt to the spouse who is more financially able to pay it off.
Debt division in equitable distribution states
In an equitable distribution state, the family court is tasked with finding a fundamentally fair division of the couple’s assets and liabilities. In other words, “equitable” does not necessarily mean “equal” – the judge may assign a particular debt to one spouse if that spouse also has a significantly greater ability to pay that debt.
Another complicating factor arises when shared assets were used to pay off separate debts. Suppose, for instance, that one spouse came into the marriage with a significant credit card debt, and that debt was paid down during the marriage using a joint bank account where both spouses’ paychecks were deposited. If the couple divorces, the other spouse would be within their rights to request reimbursement for the share of the marital assets that were used to pay off the separate debt. Whether that argument actually works would depend on the applicable state laws and the surrounding circumstances of the divorce.
What happens to the mortgage in a divorce?
In many marriages, the marital home is both the largest financial asset and the largest liability. If both parties are on the mortgage, the cleanest way to resolve the situation is to sell the house and split the proceeds. Of course, selling a home takes time, so even if selling and splitting is the eventual plan, it’s still important to work out a payment plan for the intervening time to keep the mortgage current and protect both spouses’ credit.
If one spouse (usually the one with primary custody of the children) has to keep the home, the other option is for that spouse to buy out the other spouse’s equity in the home. This may require contacting the mortgage company to have the other spouse’s name removed from the loan, or if that is not possible, refinancing the home in the remaining spouse’s name.
What happens to shared auto loans in divorce?
As with a mortgage, one option if both spouses’ names are on an auto loan is to sell the car and split the proceeds. Alternatively, the car and the associated loan may be assigned to one party or the other in the overall division of property. Generally, secured debt like auto loans follows the underlying property, so at least as far as the court is concerned, the spouse who gets the car is also responsible for paying the car loan.
Debts in both spouses’ names can become a lingering issue after a divorce
The thing to keep in mind both during and after a divorce is that if both spouses’ names are on a loan, then as far as the creditor is concerned, it’s still both parties’ responsibility, even if the court assigns it to one spouse. For example, if the court assigns responsibility for a credit card in both parties’ name to one spouse, and that party stops making payments on the card, both parties’ credit scores will be affected. This may seem unfair from the perspective of the divorcing spouses, but it’s necessary to protect the creditor’s rights.
Again, the optimal solution here is to pay off any joint debts before the divorce is finalized, or failing that, to refinance them so that they are only in the name of the spouse responsible for paying them. You don’t want your finances to be entangled with your ex-spouse’s finances for any longer than is absolutely necessary. Once there are no more joint debts, you can make a clean financial break.
If it’s necessary to keep a debt in both names for some time after the divorce, it’s best to insist on automatic payments from the responsible party’s money. That way, your credit score won’t be adversely affected if they forget (or “forget”) a payment. This isn’t foolproof, though, and should be used as a temporary measure.
A spouse who doesn’t pay a debt as ordered can be held in contempt of court
When debt is divided in a judgment of divorce, that order is binding on both former spouses. If your ex-spouse is failing to pay a debt they were ordered to pay, and it’s affecting your credit, then you can go back to court to hold them in contempt and force them to meet their financial responsibilities.
What you can’t do is break the terms of the divorce decree on your end in retaliation. For instance, you can’t withhold child support or alimony because your former spouse isn’t making payments on a joint debt. You need to follow the terms of the court order until and unless those terms are changed by a judge.
Contact an experienced divorce attorney in your area
The laws pertaining to property and debt division in divorce vary widely from state to state, both in terms of how debts are classified and how they are divided once classified. Moreover, in most states, the judge has a fair amount of leeway to decide details of how the debt is divided. A local attorney who knows your state’s laws and knows the family courts in your jurisdiction is best positioned to assess your situation and determine the best path forward.
Courtney Clark Law, P.C. is a divorce and family law firm in Illinois.
