Divorce & Dividing Debt

When couples end their marriages, they must not only divide what they own via property division, they also must divide what they owe; this section is about divorce and dividing debt.

Ideally a couple can pay off all outstanding debts before a divorce so the issue never even comes up, but in reality, this may not be possible. Accordingly, couples are usually left with two choices: either pay off the entire debt together after divorce or divide the debt so that each is responsible for paying his or her share.

In both situations, one spouse must trust the other to hold up his or her end of the bargain or else they risk future credit problems. From this potential danger alone, it is easy to see why paying off debts before divorce is the best idea. Indeed, it may even be in your best interest to sell assets in order to pay off marital debts before even getting to court, but as always, be sure to consult an attorney.

What is considered marital debt?

Marital debt generally includes those debts that were incurred for the joint benefit of both spouses during the marriage, although note that actual use isn’t necessarily a controlling factor. Any debt incurred with the hopes of creating marital property is also considered marital property.

Not all debts incurred during marriage are classified as marital debt, however. Debts acquired through dissipation of assets, gambling, reckless investing, etc., will not be thrown into the marital debt pile to be divided among spouses.

How is debt divided?

In dividing debt, again we must look to whether the state in which the divorce will be filed applies equitable distribution or community property principles. In the latter, regardless of who incurred the debt and whose name appears on it, both spouses are responsible for repayment.

In equitable distribution jurisdictions, debts only in one spouse’s name indeed remain the debts of that spouse; on the flip side, a debt in a spouse’s name even if s/he has received no benefit is also considered his or her debt.

Regarding joint marital debt, however, most states consider the following factors:

• Who has incurred and/or benefited from the debt
• Debt’s relation to an asset (e.g., a mortgage on the marital home if one party is still living in the home)
• Spouse in a better financial position to repay the debt

With jointly incurred debt, however, know that creditors still may have the right to go after both spouses even if the court has assigned the debt to one or the other partner. Joint credit card debt, for example, can be pursued from either party even if a divorce agreement assigns the debt to only one spouse; credit card companies are not bound by property division agreements in divorce.

The law requires that secured marital debts (such as a mortgage) are offset against the value of the asset whereas unsecured marital debts (such as credit card debt) must be considered in the overall scheme of property division, so that each party receives a relatively equal share of the marital estate.

There are many ways to try to avoid the potential dangers with debt division during divorce, including transferring or refinancing debts, so be sure to talk to an attorney to go over all of your options *before* you file any papers.