Division of Debt in a Divorce.
Living on debt is reality for many American families. Obligations exceed cash flow, and people regularly borrow to make ends meet. And while managing heavy debt loads is commonplace, debt strains marriages and contributes to marital problems. So if the couple does end up in divorce court, how is the debt dealt with by the court?
The answer is that both property and debt are to be equitably divided in a divorce. This means that the judge is to divide property fairly and assign responsibility for debt. Some of the factors that a judge will consider when dividing debt might include:
1.) The nature of the debt. Was the debt incurred for a marital purpose, or was it incurred for the entertainment of one of the spouses? For example, were charges on a credit card for home improvements or an expensive rock concert that only one spouse attended? While ordinarily, all debt incurred during the marriage is considered marital debt and divided, sometimes judges will allocate certain debts based on the nature of the debt.
2.) Both parties resources. The judge will consider both parties resources at the time of the divorce when allocating debt. So if one of the spouses post-divorce has a better ability to absorb the debt into his or her monthly budget, the judge might make that spouse responsible for all of it or a greater portion of it (e.g., wife pays 70%, and the husband pays 30%). Or the judge might consider that one of the spouses has a large inheritance and can better afford to pay the debt.
3.) Who incurred the debt, and why? Was the debt necessary for a medical emergency? Or was it taken out shortly before the divorce for cosmetic surgery? The judge will consider the reason the debt was incurred. For example, the judge may factor in that one spouse incurred a particular debt without the knowledge of the other spouse. Again if the debt were for a legitimate and necessary marital purpose (a plumbing emergency, for example), it would typically be divided equally regardless of the other spouses advance knowledge.
4.) Who benefits from the debt? The judge may consider whether a spouse exclusively benefits from a debt. For example, if one of the spouse’s incurs debt for a Masters Degree, the court might allocate the debt to the educated spouse, who will be the only one benefitting from the degree. However, the court may consider allocating the debt if the degree allows the other spouse a reduced maintenance amount. With regard to debts for the purchase of assets, usually, the spouse keeping the asset (a car payment, for example) will keep the debt.
5.) When the debt was incurred. If one of the spouse’s incurs debt considered extreme or frivolous during a period of time that the marriage is breaking down, the odds are pretty good the court will award the debt to the spouse who incurs it. On the other hand, if one of the spouses incurs debt before the marital breakdown and the other spouse now disagrees with, the court will not necessarily assign the debt solely to the spouse incurring it.
There are no hard and fast rules other than to try to allocate the debt fairly. Judges weigh all of these factors and more when dividing debt. But there are some common-sense steps that you can take to protect yourself from unnecessary liability for debt after the divorce is finalized.
How to Protect Yourself.
Practice divorce self-defense. Consider some of the following protections for yourself:
- Do a credit check on yourself to make sure there are no debts in your name that you may not be aware of.
- Keep receipts for all charges on your credit card so you can explain all those charges and the reason for the charge.
- Don’t incur any new debt if you can avoid it at the time of the divorce or shortly before the filing.
- Advise your lawyer if either you or your spouse have ever filed for bankruptcy, this might affect the allocation of the debt. In that regard, if you have too many debts, discuss with your lawyer the advisability of filing bankruptcy now.
- Ask the judge for temporary court orders providing for the payment of debts during the divorce to preserve your credit. Additionally, consider seeking orders limiting your spouse from incurring further debt without court permission.
- Cancel joint credit cards or other joint debt, if possible, to block your spouse from incurring additional debt without your knowledge or consent.
- Avoid arrangements with your ex-spouse responsible for paying joint debts. Any late payments will negatively affect your credit even if the ex-spouse is ordered to pay the debt. If possible, insist on getting your name off of the debt through a refinance or other means.
- Consider creative ways to pay all debts (draw on a 401(k), for example) to maintain cash flow post-divorce.
Many families rely on debt to maintain their standard of living. But ultimately, the creditors need to be paid. And when couples divorce, that debt needs to be addressed as part of the divorce. Sometimes bankruptcy solves the problem, although that has consequences to your credit. Other times the debt can simply be equitably divided between the spouses. But one thing is certain, proper divorce planning and sensible protections will help you better weather the double trouble of debt and divorce.