When married couples split up, they must decide who gets which property items. There is much to split up – perhaps a house, cars, furniture, personal items, etc. One important matter that often gets overlooked and pushed off until the end is marital debt.
At least through TV and movies, we have all become familiar with dramatic debates over who gets the sterling silver and the stainless steel, but we haven’t seen many conflicts over who has to take over the loan on the RV. Dividing assets is certainly one priority for divorcing couples, but what happens with their debt can be just as important financially, with results that go on for years.
If they can agree, joint debt is best worked out between the divorcing parties outside of a courtroom. Many couples go to mediation to resolve questions of how marital debt will be paid back. If an agreement can’t be reached, the judge in the divorce court will hear both sides of the case and make a judgment to which parties are legally bound to adhere.
If dividing debt during a divorce will work out, financial information must be fully shared with both sides. Ideally, the parties make financial decisions jointly, and each knows how much is owed to whom. Even if they weren’t, sorting it out now should be a team effort. Doing it right will mean less financial damage afterward, including each person’s credit score and credit report.
How Does the Court Divide Debt in a Divorce?
First, it should be noted that each party will be assigned any debt that the party brought into the marriage (“personal debt”). If one party owed a car loan before the couple got married, then even if the debt was paid out of a joint checking account during the marriage, the party who originally had the debt will get it back again.
Concerning jointly held debt, there are two forms of marital property and debt ownership in the United States. One is called “equitable division” or “common law division.” Forty-one states adhere to this system. In equitable division, equality of distribution – ensuring each party gets the same amount of assets and debt to repay – isn’t really the goal. Rather, courts look at fairness and the ability to pay. A spouse who has a higher income, or is awarded more property, may be assigned more debt.
The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin, and Puerto Rico. Residents can opt into some form of community property in Alaska, South Dakota, and Tennessee. In a community property state, considerations of which spouse earns the most or is awarded the most property are not considered. Nearly all marital property is held equally (there are some exceptions). This is also applied to debt.
Specific Types of Debt
Auto Loan Debt
Auto loans in both names can be a real problem in a divorce. In most cases, one person can keep the car and will make the payments. The problem that comes up most often is when one person gets one of the parties’ cars, but the other person is the one who has to make the payments. It is not unusual for that party to decide they don’t want to pay anymore and not care if the car gets repossessed.
Options to consider include:
- Refinancing the loan if the bank agrees.
- Ask the court to order that the monthly payments be automatically drawn out of a checking or savings account.
- Sell the car.
- Pay off the debt before the divorce is begun or is finalized.
Like with a house, the title of the car and the auto loan are separate things. The loan and ownership should be transferred to whoever is keeping the car. This is done through a title transfer signed by both parties at your state’s Department of Motor Vehicles.
Credit Card Debt
Credit cards that are held only in one person’s name
In most states, the person whose name is on the card will be held responsible. In community property states, if the card was obtained during the marriage, both parties will be responsible for 50% of the debt, no matter whose name it is on the card.
Joint credit card debt
In most states, both parties will likely be responsible for credit card debt on a card in both their names. This is true even if one spouse was the one who used it the most or made the payments. A judge, however, may decide that one spouse can pay more than the other.
In community property states, each party is responsible for 50% of the debt from a joint credit card account.
Finally, lenders, credit card companies, and others are not parties to divorce papers. They want to be paid. If a party’s name is on any account, they are on the hook regardless of what the divorce decree says. The parties should work together to contact the companies they owe jointly and drop one name. Note: if one party doesn’t qualify for the credit card independently, the other will still be liable for that debt.
If the house is not in both names, in most cases, the court will consider each person’s financial situation, why it’s in one person’s name, who can afford to pay the mortgage, and more. In a community property state, even if it’s in only one person’s name, it will usually be considered joint property.
In most states, the court will examine whether the couple lived together (or had a legal separation) when the medical debt was incurred. If so, it is likely to be a joint debt. Debt from an emergency or other necessary medical procedure will likely be the responsibility of both parties, while debt from an elective surgery or an unnecessary procedure will likely be charged to the person who received the medical services. This goes for medical debt involving a child’s illness, birth, or emergency will usually be split between both parties, although their percentages may differ based on their ability to pay.
In community property states, medical debt incurred during the marriage is split 50-50.
Do I Need a Divorce Lawyer For Help?
If you believe your debt situation will be complicated during a divorce, you may want to consider speaking to a professional, like a credit counselor or lawyer specializing in family law. These professionals are familiar with the procedures regarding debt and divorce and have probably seen situations like yours many times. They can provide you with what is needed to ensure you rights are protected during the court processes.
Local lawyers are also familiar with the laws in your state and the nuances of dealing with splitting debt in that state. Anyone going through a complex divorce needs an attorney to represent them. The law is very complicated, and many future interests are at stake. A divorce lawyer can provide advice about the best options.
Your attorney can provide you with guidance and assistance throughout the duration of the legal process. They can also inform you if there are any changes to local and state divorce laws that might affect your legal rights or the outcome of your case.