Just like property, debt needs to be considered and allocated as a part of a divorce settlement. It is common for people to have debt in some form or another or liabilities related to certain assets, like cars or houses, that need to be figured out in a divorce.
The first things a couple should do when there are debts to be considered during a divorce is the following:
- Determine whether the debt is community or separate property.
- This can vary state by state, so look at your specific jurisdiction’s laws and consult a professional that can verify the nature of the debt.
- If the debt was incurred by one spouse and that spouse had the sole benefit of that debt then the law or a court may determine that debt is that spouse’s sole responsibility.
- Debt incurred prior to marriage that still exists may be considered separate property.
- Understand the type and cost of each specific debt listed.
- Is it secured by an asset, for example, a car or house?
- What is the interest rate?
- What are the monthly payment requirements? Is it revolving debt with flexible payments or fixed monthly costs?
Debt that is secured by a particular asset and essentially follows that asset as a part of the negotiation, like a mortgage on a house or a car loan, is typically handled during the property division discussions. When there is unsecured community debt (e.g. credit cards or personal loans) involved there are a few best practices for handling those debts:
- If the couple can, it is highly recommended to pay off all unsecured community debt ideally before filing for divorce, but if that cannot be done then secondarily make an effort to have the debt paid off through the property settlement process (e.g. if there is a house that will be sold or re-financed pay the debt off in those transactions).
- Both individuals should run their credit report and review what is showing up as joint debts and individual debts.
- Cancel any joint credit card accounts so no further debt is incurred on them.
- Cancel any secondary cards issued to the person not listed as the primary on the account.
A common misperception is that the person’s name that the debt is under is the person that is responsible for that liability. A judge can assign a debt to the party whose name the debt is not under, or you can agree that one party is going to be responsible for paying the debt held in the other person’s name based on the facts of the case. A major cautionary tale is that even if a divorce settlement determines that you are not responsible for the debt that is in your name creditors/lenders are not bound by the terms of the settlement. If your name is still on the account and your ex-spouse stops making the payments the creditor can come after YOU, so putting some monitoring controls in place to verify payments are being made in a timely manner is important if the debt cannot be re-assigned to your ex-spouse.
Managing debt and the responsibility of making the payments related to debt during a divorce is difficult, but if correctly addressed it can make it much easier for both spouses moving through a divorce and into the next chapter of their lives.
