It’s no surprise that marital debt is a significant factor in every divorce. Most states divide marital debt equally between the spouses. But, what is marital debt? Are you responsible for your partner’s student loans? What about the joint credit card that you used for a family vacation? Although there are many issues that you need to address during your divorce proceedings, and one of the most complicated tends to be, who is responsible for the debt?
Whether you're responsible for a debt that belongs to your spouse depends on whether your state follows a community property or equitable property distribution method. In community property states, like Arizona and California, the court will divide debt accrued during the marriage equally (or as close to equal as possible) between both spouses.
In equitable property states, like Michigan and Ohio, the court will divide the couple’s debt equitably (fairly) between both spouses, but that doesn’t always mean it’s a 50/50 split. Generally, if you accrued debt and used it for your benefit during the marriage, the court will assign that debt to you after the divorce. However, if you accumulated debt in your name but used it for marital purposes, such as putting a new roof on your home, the court will most likely split financial responsibility between the spouses equally.
Before a court can divide your debt, you first must categorize each bill as marital or separate. If you live in a community property state, the court may consider any debt accrued during the marriage to be joint debt, even if you didn’t know about it or sign the contract.
However, if you live in an equitable property state, a judge will usually only divide debt between spouses if either spouse used the debt to benefit the marriage. For example, if you and your spouse owned a rental property and you obtained an equity loan to put new windows in your marital home, a judge would divide the remaining loan debt between the spouses.
Typically, assets and debt that belonged to one spouse before the marriage are separate property and are not subject to division in a divorce. For instance, if you accrued $2,000 in credit card debt while you attended college, and you never used the credit card during your marriage, the judge would classify that debt as separate and assign it to you alone in the judgment of divorce.
Generally, if a spouse accrued student loan debt before the marriage, the court assigns the liability to that spouse. However, if one spouse has a significant amount of student loan debt, the court may assign more marital debt to the other spouse to balance the property division settlement. The court may also award the indebted spouse more of the couple’s marital assets to offset the debt.
If you or your spouse acquire student loan debt during the marriage, the court has a more complicated decision to make regarding debt division. In some cases, spouses who attended school were not working or contributing financially to the household. In that case, the court may reward the working spouse more property (or less debt) to offset the payments or sacrifice that spouse has already made.
Division of student loan debt can be complicated, so talk to your divorce attorney about existing loans for yourself or your spouse.
Most couples can negotiate and agree on who should be responsible for each piece of marital debt, but if you can’t agree, the judge will decide for you. At the end of your divorce, you (or the judge) will create a marital settlement agreement that will spell out the details of your arrangement, including who is responsible for each debt.
But, a family court judge can’t change the terms of the contract between you (or your spouse) and a creditor. So, you could still be on the hook for your ex-spouse’s debt even if the judge assigned it to your ex. That said, you can add an indemnity clause to your judgment which allows you to take your ex back to court for any money you had to pay the creditor because your ex-spouse failed to pay.
The first step you can take is to work with your spouse to close your credit accounts before you file for divorce. You can also take your name off any debt that doesn’t belong to you. It’s important to understand that in most cases removing your name isn’t enough to alleviate you of responsibility for the debt, so you’ll also need to work with your creditors to refinance or create a new loan application. Some creditors are reluctant to remove a spouse’s name from a joint debt because it eliminates one potential source for repayment.
If your spouse fails to pay an assigned debt, one of the best ways to protect your credit is to make sure the creditor gets paid and then seek repayment from your ex-spouse later.
Make sure that your judgment of divorce specifies a time frame for which each spouse must refinance or renegotiate the debt. For example, if the court awards your spouse the marital home, it’s essential to include a specific deadline for when your spouse must obtain a new finance agreement with the mortgage company to remove your name from the debt.
It’s no surprise that divorce is a lengthy process. To better protect yourself during your divorce, you should regularly check your credit report and bank accounts. Although you and your spouse may be separated, many states view assets and debts accrued by either spouse until the divorce is final to belong to both spouses. Don’t purchase any assets while you’re separated and avoid opening new lines of credit (or signing on as your spouse’s cosigner) until the judge signs your final judgment of divorce.