When your marriage comes to an end, finances might not be your first concern, but questions are sure to arise. Income and savings are sometimes the focus (the proverbial “s/he’s going to take half”), but you also need to consider your debts. Who will be responsible for the mortgage or auto loans, what happens with credit card debt, and what if the other person took on debts without you knowing about them?
The laws that govern how debt is split after a divorce can vary from state to state and could depend on the type of debt, when the debt was acquired, and your agreement with creditors. With that in mind, we’ve created a high-level guide to cover what could happen to debt after a divorce.
Creditors Aren’t Bound by Divorce Decrees
Before jumping into how debts could be divided, it’s important to make a distinction between responsibilities as defined by a divorce decree and creditors’ rights.
According to Amey Teklikar, a family law attorney with Deccan Law in Long Beach, California, “The divorce decree doesn’t prevent the lender from going after anyone that is a party to the debt.” In other words, even if the divorce settlement doesn’t say you’re responsible for a joint account, the lender could still go after you for missed payments. The corresponding late payments, and other derogatory marks, could also hurt your credit.
Distinguishing Between Separate and Marital Property
Debts that belong to someone before marriage are often considered pre-marital debt. After the divorce, the original debtor will continue to be solely responsible for the debt. However, both spouses or a court will need to decide how to divide marital debts, those taken on after the marriage. The decision is in-part influenced by where you live when you file for divorce.
In community property states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin — earnings and debts accrued during a marriage belong to both spouses. Couples in Alaska and Tennessee can also opt for community property agreements.
“What that means is that the debts accrued from the date of marriage to the date of separation are divided equally,” says Teklikar. Even if your spouse racked up debt on a credit card you weren’t aware of, you could still be responsible for half the debt if you’re in a community property state.
In non-community states, also known as equitable distribution states, the debt only belongs to both spouses if they cosigned the loan application. Marital property, which both spouses helped pay or sign for, and shared debts will be split in an “equitable” manner – often what the court determines is fair.
You could also wind up with “quasi-community property,” as Teklikar calls it, if you’ve moved between a community property state and an equitable distribution state. Depending on where you live when filing for divorce, even property that was acquired in a non-community state could be considered marital property during the divorce proceedings.
The Type of Debt Could Impact Your Next Steps
Making the distinction between separate and marital debts will help you, a mediator, or a court determine how the debts will be assigned during the divorce. However, other details can influence how each individual debt gets split up.
“Debts that are associated with an asset (like a car loan) will usually go to the spouse that keeps the asset,” according to Jeffrey Kash, a divorce attorney with Kash Fedrigon Belanger, LLC in Stroudsburg, Pennsylvania. He says, “the ideal would be for the spouse keeping the joint loan to refinance or otherwise remove the other spouse from the loan; however, that is frequently difficult.”
Mortgages and Other Secured Debt
With a home, you may not qualify for mortgage refinancing based on your income alone. Some lenders might let one person assume the remainder of the mortgage without going through refinancing, but it’s not always an option and approval could still depend on your credit. Often when neither of these options work, the couple sells the home and splits any resulting assets or liabilities.
Another possibility with the home is to keep both parties on the mortgage and have the person who lives in the home make monthly payments. However, this arrangement could result in trouble, as both spouses are still legally responsible for the debt. The person who isn’t living in the house also might have trouble qualifying for a mortgage, although a divorce settlement and decree that states the mortgage is the other person’s responsibility could help.
Similar options are available if there’s an outstanding auto loan. The person keeping the vehicle could try to refinance the debt, pay off the loan, or you may have to sell the vehicle and share the profit.
Unsecured debts, such as credit card debt, also may need to be divided during a divorce. In non-community property states, generally only the debts from joint accounts will get divvied up. In community property states, all the debt could be split down the middle regardless of who’s name is on the account and what was purchased. However, there are exceptions to the rule, and if a spouse used a credit card for purchases that clearly did not benefit the marriage it could be ruled his or her individual responsibility.
You may want to use shared savings, or proceeds from the sale of shared property, to pay off unsecured debts debts. With credit cards, you could try to transfer the debt to non-joint accounts, giving each spouse full responsibility for a portion of the debt.
What Could You Do to Avoid Sharing Debts After the Divorce?
A prenuptial agreement could help you keep individual debts or assets from becoming marital property. Postnuptial agreements, which are signed after a marriage, can also lay out how debts and assets will be divided during a divorce. However, if you’re already in the midst of a divorce it may be too late for either of those options.
Divorce attorneys often recommend those who are in the midst of divorce proceedings try to eliminate as much shared debt as possible. You may need to sell marital assets, use shared savings, or transfer debts to a spouse’s account to accomplish this task. In some cases, you might want to create a formal agreement that requires profits from sold assets be used to pay off debts before either spouse can claim them.
If you do have joint accounts, Carolyn Woodruff, a managing attorney at the Woodruff Family Law Group in Greensboro, North Carolina recommends closing them early in the divorce process. You don’t want a soon-to-be ex raiding shared savings or racking up debt on a shared credit card.
Should You Work with Mediator?
Rather than heading straight to court, some couples try to work things out in an amicable way with a mediator. Leena Hingnikar, an attorney with Walzer Melcher, LLP in Woodland Hills, California feels that a mediator who is also an attorney is often your best bet. “Leaving big decisions in the hands of a third party judge that does not know your family and must divide your debts according to the law is not good for all couples,” says Hingnikar. But when couples find a mediator who is an appropriate fit for their situation, “They will also save a lot of money on attorneys (money that could probably be better spent elsewhere).”
Teklikar, who works as a mediator for couples, thinks the process generally only works when the marital community estate is already divided fairly evenly. While the mediation process can start on the right foot, he says, “disagreement over a particular point grinds the process to a halt… Once mediation breaks down, often the only remedy is a return to the traditional divorce process.” He suggests hiring an attorney and going the traditional route while being as collaborative as possible.
While some people focus on how savings and income will be split up after a divorce, determining how much debt you might take on could be just as important. Generally, you’ll close joint accounts when you start the divorce process and try to pay off or transfer shared debts during the divorce. However, because the process for distributing debt and determining responsibility can vary widely, you’ll likely want to discuss the process and your options with a divorce attorney.
However you proceed, be sure to take your credit into account. If possible, you won’t want to leave your credit vulnerable to the actions of your former spouse by remaining as a co-signer on a debt they primarily control (like a car or home). And you’ll also want a game plan for budgeting as a single, which will likely be a significant change. Be prepared to alter your lifestyle while you pay down any newly acquired debt or simply adjust to a new level of monthly income and expenses.