December 2, 2023

Divorce can be an emotionally and financially difficult time. One of the most complicated parts of the divorce process is determining how to split up debt that you and your spouse incurred during your marriage. This is an important issue to address, because how debt is divided in divorce can impact your financial well-being and credit score for years to come.

This article will discuss the different types of debt in a divorce, how responsibility for joint debt is determined, the impact of dividing up debt on your credit, options for managing debt after divorce, and more key information to help you make the best financial decisions during this difficult time.

Who is Responsible for Debt After Divorce?

The general rule is that debt incurred jointly during the marriage is considered “marital debt” that will be divided somehow in the divorce. However, there are exceptions, and some states have unique laws around debt responsibility.

In community property states, marital debt is divided equally in a divorce. The community property states are:

  • Arizona
  • California
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin

In other “equitable distribution” states, marital debt will be divided equitably (or fairly) as part of the overall divorce settlement. The debt doesn’t necessarily get split 50/50. The divorce decree will outline each spouse’s responsibility for debt.

Some key principles determine debt responsibility:

  • Debt incurred individually (in one spouse’s name only) usually remains the responsibility of that spouse.
  • Joint debt is generally divided somehow in the divorce.
  • Debt incurred for family necessities (food, clothing, shelter, transportation, education, etc) during the marriage may be considered marital debt.
  • Debt incurred after separation or filing for divorce is usually considered separate debt belonging to the spouse who incurred it.

The timing and purpose of any loans or debt will impact how it is divided in a divorce. An experienced divorce attorney can advise you on debt division based on the specifics of your situation.

Types of Debt and Who Is Responsible

Certain types of debt are treated differently in a divorce. Here is an overview of common debts and how they may be divided:

1. Credit Card Debt

Credit card debt is generally considered marital debt if the cards were joint accounts or the charges were made during the marriage for the family’s benefit.

Joint credit card balances may be divided equally or equitably as part of the divorce settlement. The divorce decree can stipulate that each spouse pays off certain joint credit cards.

If one spouse racked up credit card charges on individual cards (in their name only), they will likely be responsible for paying that debt. However, if those charges were used for family purposes, the debt may still be divided.

2. Mortgage Debt

The mortgage on the marital home is typically considered marital debt to be divided in some way. Options include:

  • Sell the home and split proceeds, paying off the mortgage.
  • One spouse keeps the home and takes over the mortgage payments.
  • Home is sold later and debt is divided then.

Refinanced mortgages taken out separately may be considered one spouse’s debt. Home equity loans create joint debt that is usually divided.

3. Auto Loan Debt

Auto loans are generally marital debt if the cars were used by both spouses. The divorce decree may assign one spouse to pay off a car’s loan while awarding them the car. Or the car may be sold and loan paid off from the proceeds.

If one spouse has a separate car and loan in their name only, they will likely be responsible for the auto loan debt.

4. Student Loan Debt

Student loan debt is typically viewed as individual debt belonging to the spouse who incurred it. However, in some cases, the amount of student loan debt may be divided or one spouse may agree to pay some of it, especially if the education benefited the marriage.

5. Medical Debt

Medical debt incurred during the marriage is usually considered joint or marital debt to be divided equitably. One spouse’s separate outstanding medical debt may remain their own.

6. Personal Loan Debt

Personal loans taken out jointly for family expenses are shared marital debt. Personal loans in one spouse’s name only usually remain that spouse’s duty. But if funds were used for family needs, the debt could still be divided in an equitable divorce settlement.

7. Debt Incurred During Separation But Before Divorce

Once separated, spouses take on debt individually. So debt incurred after separation but before the divorce is usually considered separate, belonging to the spouse who acquired the debt.

However, if debt was used toward marital expenses (mortgage, cars, insurance, taxes, etc.), it may still be divided by agreement. Non-essential debt incurred while separated is generally one spouse’s separate debt.

How to Separate Assets and Debts in Divorce

During divorce negotiations, couples will decide who gets assigned responsibility for paying off specific joint accounts and loans. There are a few common ways debt can be divided:

  • One spouse keeps an account in their own name – The spouse whose name is already on the account keeps responsibility for paying that debt. This is common with credit cards, student loans, medical bills, and personal loans.
  • Joint accounts are split – With a joint loan like a mortgage or car loan, the divorcing couple may sell the asset (house or car) and split the sale proceeds after paying off that debt. Or one spouse may refinance or assume the loan in their name only.
  • Debts are divided evenly – Assets and debts may be totaled and then split down the middle. For example, if a couple has $100,000 in joint assets and $60,000 in joint debt, the assets get divided $50,000 each and each spouse takes $30,000 of the debt.
  • One spouse takes on more debt – To compensate for keeping certain assets, one spouse may take on a larger share of joint debt through the divorce decree.
  • Debt is negotiated – Spouses may negotiate who takes on more debt based on factors like who benefits more from the divorce or who has better income and credit to manage taking on more debt.

Your divorce lawyer can advise you on the best options for dividing and assigning debt in your unique situation while keeping in mind your state’s divorce laws. The goal is a property and debt division that sets up both spouses for financial success after divorce.

Impact of Divorce on Credit Score

Ending joint financial accounts during divorce can negatively impact your credit score. Strategic planning can help minimize damage:

How divorce affects credit score

  • Closing joint credit card accounts lowers total available credit, raising credit utilization ratios.
  • Defaulting on debt obligations because of inability to pay hurts credit ratings.
  • Errors like delinquent payments being wrongly assigned can also occur.

Protecting your credit score during and after divorce

  • Maintain low balances on joint credit cards while finalizing divorce, then request new individual cards.
  • If keeping the marital home, refinance the mortgage in your name only.
  • Monitor your credit and dispute any errors relating to ex-spouse’s accounts.

Debt relief options after divorce

For many divorcing couples, splitting up debt is complicated by the fact that they can’t afford to service all that debt separately on their own. Here are some options to consider if debt relief is needed post-divorce:

  • Negotiate with creditors – For debts only in one spouse’s name, call the creditor, explain the situation, and request options like lowered interest rates or modified payment plans.
  • Debt management program – A nonprofit credit counseling agency can set up a debt management program to negotiate with your creditors and consolidate debts into one payment.
  • Balance transfer credit card – Transferring high interest credit card balances to a card with a 0% intro APR can reduce monthly payments.
  • Debt consolidation loan – Borrowing one lump sum at a lower interest rate to pay off multiple higher rate debts.
  • Home equity loan – If you kept the house, a home equity loan or line of credit can provide funds to pay off other debts.
  • Bankruptcy – Declaring bankruptcy may be an option to discharge debts if you truly cannot afford repayment. Be aware it will also damage your credit.
  • Sell assets – Selling assets like cars, collectibles, or a second home can provide funds to pay off debts.

Dealing With Debt: Debt Relief Options After Divorce

After a divorce, you may find yourself struggling to pay off your portion of the marital debt. There are several debt relief options available:

  • Debt Consolidation: Combining multiple debts into a single loan with a lower interest rate.
  • Debt Management Plan: A plan set up by a nonprofit credit counseling agency to repay your debts over 3-5 years.
  • Debt Settlement: Negotiating with creditors to accept less than the full amount owed.
  • Bankruptcy: A legal process to eliminate or repay debt. A last resort option due to its severe impact on your credit score.

Frequently Asked Question

Q: How can I protect myself from my spouse’s debt during a divorce?

A: To protect yourself from your spouse’s debt during a divorce, it is important to document and gather evidence of the debt, such as credit card statements or loan documentation. It is also advisable to consult with a divorce attorney who can guide you through the legal process and help ensure that your interests are protected.

Q: Can I be held responsible for debt incurred after separation but before the divorce is finalized?

A: In some cases, a person can still be held responsible for debt incurred after separation but before the divorce is finalized. This will depend on the specific circumstances and the laws of the jurisdiction. It is recommended to consult with a divorce attorney to understand the implications in your situation.

Q: Can a creditor remove my name from a joint debt after divorce?

A: A creditor is not obligated to remove your name from a joint debt after divorce. Even if the divorce decree assigns the responsibility for the debt to your ex-spouse, if your name is still on the loan or credit account, the creditor can continue to hold you responsible for the debt.

Q: What if my ex-spouse fails to pay their share of the debt?

A: If your ex-spouse fails to pay their share of the joint debt as agreed upon in the divorce settlement, you may have legal recourse to enforce the agreement. This can include seeking a court order to compel payment or taking other legal actions to protect your interests.

Q: Can I be assigned more debt than my ex-spouse in the divorce?

A: Yes, it is possible for one spouse to be assigned more debt than the other in a divorce. The allocation of debt will depend on various factors, such as each spouse’s income, earning capacity, assets, and financial needs. The court will typically strive for a fair and equitable division of the debt.

Bottom line

  • Debt incurred during the marriage is generally considered joint debt and is split between both parties in a divorce.
  • The divorce laws vary by state, especially between community property states and separate property states.
  • Credit card, auto loan, and other debts are typically divided based on whose name is on the account and when the debt was incurred.
  • Post-divorce, it’s essential to monitor your credit reports and close joint accounts where possible to protect your credit score.
  • Several debt relief options are available if you’re struggling to pay off debt after divorce.

When a marriage ends, unraveling financial entanglements like joint accounts and debt can be as hard as splitting up possessions and real estate. Rules on debt division vary by state, and the timing and purpose of loans impact responsibility. But some shared principles apply, and an equitable split with clear terms helps provide closure.

Consulting divorce attorney helps navigate this tricky process. Managing debt wisely after the split enables both spouses to move forward financially. With a thoughtful approach and commitment to fairness, couples can separate their joint finances and achieve a “clean break” divorce.