When you consider that 40-50 percent of marriages in the U.S. end in divorce, it shouldn't surprise you that some marriages end in a financially messy way. Marriage typically involves the joint payment of debts just as it involves collecting joint assets, and everything — both assets and debts — must be distributed in some way when a couple calls it quits.
Community property vs. common law states
In a lot of ways, what happens to your debts and assets depends on where you live. If you reside in one of the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) or "opt in" for community property in the state of Alaska, then all debts accumulated during a marriage are the responsibility of both parties no matter how they were held. This means that if your spouse ran up a secret credit card balance during your marriage, that debt is your responsibility as well as theirs in a community property state.
If you live in one of the remaining states, then you live in an equitable distribution state (also known as a common law state). Typically, this means that debt incurred during a marriage is the responsibility of both parties, if both parties were joint owners of an account. If one spouse opens an account in their name only, on the other hand, that debt is their sole responsibility.
What happens to debt incurred during separation?
Note that debt incurred after a couple separates may be treated differently than debt incurred during a marriage. Your liability for such debt usually depends on your state, whether you took out the debt jointly or separately, and whether the debt was used for, say, a spending spree in Las Vegas or necessities for your children such as food and rent.
Since the moment of separation is figured differently in different states, the cutoff for new debt can also vary. In some states you need to legally separate while others consider the moment of separation as starting when you begin living apart.
How are debts divided when you divorce?
Sally Boyle, a certified divorce financial analyst and author of Deconstructing Divorce, says that no matter whether you live in a community property or equitable distribution state, debts are divided along with assets during a divorce. This means the court system that handles your divorce will help you figure out ways to split your debts equally and fairly.
Credit card debt
If a couple has credit card debt that is jointly held, for example, both spouses can try to move the debt into two separate accounts.
"The challenge with joint debt is going back to the lender to split the debt up," says Boyle. It's possible your credit card issuer may not want to help you move part of the debt into a new account in one spouse's name, although they will usually cooperate if both spouses have good enough credit to qualify for an account on their own.
As an alternative, Boyle says a balance transfer card can be a good way to split up credit card debt if at least one spouse can get approved. "It all comes down to whether the card issuer approves or not," says Boyle.
Mortgage debt is handled similarly to credit card debt, except that there is an asset involved, since mortgage debt is secured by your home. If you own a home together and the debt is in both of your names but you get divorced, then it's possible that one spouse can keep the home. In that case, Boyle says most couples go to their mortgage company and ask it to approve the remaining spouse to refinance the home in their name only.
If there is equity in the home, there are several ways to split it. If one party keeps the house, they could "buy out" the other person with cash. "You could also refinance the home for what it's worth and get cash out," says Boyle.
Another option is for the remaining spouse to get a home-equity loan and use some of the cash to give the other spouse their share of the equity. A final option is to just sell the house and split the proceeds, notes Boyle.
What about cars? Auto loans can work a number of different ways. Many times, each spouse will keep the car they drive and take over the payments even if both spouses are on the loan. However, it often makes sense for each spouse to refinance the car loan into their own names when they don't want to continue sharing a joint debt after divorce.
Then there are student loans to contend with. Boyle says that since student loans are taken out by only one spouse most of the time, the debt is often retained by the borrower. However, there are some exceptions.
"I've had situations where a spouse might pay off the other spouse's student loans as part of a broader divorce settlement," she says. "Maybe they were the breadwinner or they had more assets."
Why couples typically split up debts during divorce
Attorney Nicholas Dowgul of Felton Banks in Raleigh, North Carolina says couples there occasionally continue holding debt together after divorce.
Basically, if the parties get a divorce and no equitable distribution action is filed, then equitable distribution (property settlement) is waived by both parties and the debt remains in whomever's name it was, says Dowgul. But if it's joint debt, then it remains the obligation of both spouses.
However, the problem with joint debt after divorce is that one spouse may not stick to the agreement. In that case, the creditor would likely go after both spouses for repayment, regardless of their agreement to remain jointly liable.
For example, imagine there's a court order from a North Carolina court that says the husband is required to pay the credit card held jointly by the parties, but he stops paying his part of the bill. The card issuer will hold both spouses liable for the debt and repayment, meaning the bank will come after the wife as well, even though, according to the divorce decree, she's not responsible for paying that credit card bill.
This doesn't mean that the husband would be off the hook, however. If he agreed to hold the debt jointly during the divorce settlement, then he could be held in contempt of court unless he pays what was ordered, notes Dowgul.
To avoid situations like this one where one spouse stops paying their share, many couples opt to pay off joint debts and close all joint accounts, then refinance remaining debts in one or the other's name only. It's just too risky to remain in an account with an ex-spouse, especially if you can avoid the situation altogether by moving debts into separate accounts.
What can you do to ensure debt is distributed fairly when you divorce?
While Dowgul only practices law in North Carolina and believes people in other states should consult a local divorce lawyer for specific advice, he says he recommends his clients write up a separation agreement once they decide they are going to divorce. A separation agreement should include a basic understanding of who gets what after the divorce, including which person is responsible for each debt accrued up to that point.
In the state of North Carolina, couples have to be separated a year and a day before a divorce is granted, he says. While there's no requirement in his state that couples get their separation in writing, it makes things easier if the parties can at least agree on matters involving debt and assets upfront.
Finally, hire a divorce lawyer who can represent you and ensure you're left with a fair number of assets and no more than your share of the debts once your divorce is final. "The goal of divorce is for each spouse to end with assets of similar value," says Boyle. "It's not always a 50/50 split, but it needs to be a fair split."
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