Separating from your spouse means splitting up your finances – debt and all.
10 Things You May Not Know About How Debt Is Handled During Divorce
There’s nothing easy about divorce. In addition to the emotions involved, there are difficult decisions inherent in separating one life back into two.
Whether you want to face it or not, divorce is a common part of life. Ninety percent of people marry by age 50, according to the American Psychology Association.  But 40 percent to 50 percent of married couples divorce.
During their time together, they likely accumulate assets and probably create debt. Knowing what happens to finances through divorce can help people avoid catastrophe later.
Here are 10 things you should know about how debt is handled during a divorce…
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1. Debt responsibility varies by location
When it comes to untangling your financial life during a divorce, your location determines in large part who is responsible for what debt.
For example, community property states hold both spouses liable for debts they incurred while married regardless of whose name is on the account, as a general rule (exceptions do apply). Community property states include:
- New Mexico
2. How an equitable distribution state handles debt
The majority of states adhere to the “equitable distribution” rule.
In these states, a family court judge will decide what’s equitable (or fair) and distribute assets and debts accordingly. Each spouse can legally claim what they feel is a fair and equitable amount of their assets as well as their debts.
Assets and debts may not be divided using the same formula in every case. One spouse could have more debt than assets or vice versa, for example.
3. Lender contracts remain in place despite divorce
A divorce doesn’t matter to your lenders. One or both of you signed a loan agreement to borrow money. That obligation isn’t affected by a divorce.
Creditors don’t tend to know whether or not you have gotten divorced because this information doesn’t appear anywhere like a credit report. Changing your name or address will not get you off the hook for repayment of any outstanding balances.
4. Creditors may come after you on your ex-spouse’s accounts
Creditors often pursue the other spouse for payment on delinquent accounts. This can happen even when the innocent spouse’s name is not on the account. It can also happen even where the spouses are no longer married.
If you live in a community property state, one way to counteract this is to include a provision in your divorce decree that indemnifies you on any account in your ex-spouse’s name should they default. Besides repaying the debt, you’ll also be responsible for late fees and any collection costs.
Another option is to pay your ex-spouse’s debt and keep proof of payment. Then, you can contact family court and ask them to help you get reimbursement from your ex.
5. Student debt isn’t shared in some situations
While a mortgage, car loan, and credit card debt may be shared debt, student debt is different. If you racked up student loans before marriage, that debt remains your sole liability.
The only way that student debt in your ex-spouse’s name would be your responsibility is that if it was somehow listed that way in a prenuptial agreement.
6. Student debt acquired during marriage can get tricky, too
When student loan debt is incurred during the marriage, it becomes a bit more challenging to navigate. Unless both spouses co-signed for that student loan, the issue of who is responsible then depends on the state you live in (i.e., community property or equitable distribution state) and who benefitted from the student loan.
7. Joint responsibility for unsecured debt
Unsecured debt like credit cards is the fiscal responsibility of both parties in a divorce. If you both decide to not pay it off, then both of you will see your credit scores dip.
During a divorce when you are splitting up assets, it’s a good idea to consider using some of those proceeds to get rid of the joint credit card debt.
8. Consider refinancing existing debt
If your divorce is relatively civil, you may want to discuss refinancing your existing debt to remove each other’s names from specific debts, leaving only one spouse responsible for those payments. You may each have to apply for your own new loan. Sometimes this can be challenging due to a low credit score or reduced income.
This strategy can help each person to move on financially, mentally and physically.
9. The best option is no debt
While some amount of stress in divorce is probably unavoidable, one way to make the process smoother is to agree on paying off debts prior to filing for divorce. If you can look past individual needs and focus on achieving a mutual benefit, this can provide financial advantages for both of you.
10. Consider mediation and get legal guidance
To facilitate how you handle debt during divorce, consider working with a mediator after seeking professional legal counsel.
While mediation may not always work, it’s worth trying to see if you can reach a mutually agreeable decision on how to split assets and debt. This approach can minimize the legal costs that you would both have to pay – a significant cost to bear when you’re already faced with considerable debt.
11. Final thoughts
Divorce and debt are both challenging individually. Combined, they can create a truly stressful blend of complex legalities.
Learning more about the legal and financial complications can help separating couples to take a positive and proactive approach to handling debt.
Published by Debt.com, LLC