How Debt Is Divided in Divorce

Most people going through divorce worry about dividing their property. But dividing debt can be just as important—if not more.

Divorce and Debt—Does One Have Anything to Do With the Other?

Most definitely. Dividing debt in a divorce goes hand-in-hand with dividing property. In fact, splitting debt during divorce is sometimes more significant than splitting property, particularly if the spouses don’t have many assets.

Does Every State Deal With Debt the Same Way?

No. How a state handles property and debt division in a divorce depends on whether it’s an “equitable distribution” state or a “community property” state. Equitable distribution states divide property and debt based on what a judge determines is fair under the circumstances of each case. (“Fair” doesn’t always mean “equal”.) Community property states, on the other hand, aim toward a straight 50-50 split of property and debts.

That said, you must remember that each state has its own divorce laws. So the law in one equitable distribution state might vary somewhat from the law in another. The same goes for community property states.

How Do Equitable Distribution States Divide Debt?

As a general rule, in equitable distribution states (like New Jersey) both spouses are responsible for debt that either spouse incurred during the marriage (often referred to as “marital” debt).

Spouses can also have “separate” debt. This usually refers to obligations that arose prior to the marriage, and these would continue to be the sole responsibility of the spouse who initially incurred them.

But be aware that sometimes couples use marital assets (like a joint bank account) to pay for one spouse's separate debt. This can cause problems in the divorce, because spouses who didn’t incur the original debt might now seek reimbursement for their share of the marital assets used to pay that debt. Whether or not that argument succeeds would depend on the circumstances of each case, and your state’s divorce laws.

Some states also characterize a debt as separate if the spouse acquired the debt after the couple began living “separate and apart,” generally meaning they no longer have sexual relations with each other.

In certain unique circumstances, a judge might consider a debt incurred during the marriage to be a separate obligation, belonging only to one spouse. Let’s say a spouse is having an affair, and in furtherance of that relationship accrues substantial credit card debt for things like gifts or expensive trips with the third person. Divorce laws will likely allow a judge to hold the philandering spouse solely responsible for those credit card expenses.

Dividing marital debt is a balancing act, and it’s up to the court to decide who should be responsible for what. Again, in equitable distribution states it all boils down to fundamental fairness. For example, if a judge finds that one spouse has a significantly greater ability to pay a particular debt, it might assign that debt exclusively to that spouse.

How Do Community Property States Divide Debt?

As indicated above, the goal in community property states (like California) is to divide property and debts as evenly as possible between the spouses.

Like equitable distribution states, community property states differentiate between debts both spouses are responsible for, and debts that are individually owed. The law considers debts incurred after the marriage date and before the couple separate to be “community” debt. Even if only one spouse incurred the obligation, it’s still a 50-50 joint responsibility.

Debts that arose prior to marriage and after separation are normally characterized as “separate” debt. So, for example, in the case of one spouse’s student loan debt acquired before the marriage, divorce laws would ordinarily classify that as a separate obligation.

Note that in situations where the value of the community property isn’t enough to cover the amount of community debt, the law may permit a judge to bypass the equal division of debt rule, and divide the debts between the spouses based on which spouse is better fixed financially to pay them.

Again, laws vary from state to state, so if this scenario applies to you, check with a local family law attorney to see whether your community property state allows this uneven division of debt.

Is There a Way to Prepare for Dividing Debt in a Divorce?

By all means. Preparing to address debt distribution in your divorce is a carbon copy of preparing to divide assets—you make lists. Identify all the debts you have as a couple. Then, to the degree you’re able, break those debts down into joint obligations and separate obligations.

If there’s a dispute between you and your spouse as to how to characterize a particular debt, list it in a separate column. And remember, your lists are only a starting point, because the court might change a debt’s classification as joint or separate based on the facts of your case. But at least you’ll have gotten the ball rolling.

Divorce Settlement Agreements

The vast majority of divorces don’t go to trial. That’s because spouses are usually able to resolve their differences at some point in the divorce process, often with the aid of their attorneys or a qualified family law mediator.

Once a case is resolved, the spouses memorialize the settlement terms in a written settlement agreement (sometimes referred to as a “property settlement agreement” or “separation agreement”). This document constitutes a binding contract between the spouses, and typically is incorporated into the final judgment of divorce.

The agreement almost always encompasses all the issues in the divorce, including debts. So rather than having a judge make the decision on debt distribution for you, you have an opportunity to control your own fate in that regard. In addition to that benefit, entering into a settlement will almost invariably save you time, anxiety, and attorneys’ fees.

Note also that if you and your spouse entered into a valid prenuptial agreement (prenup) which addressed the issue of debts, as a rule courts will abide by the prenup’s terms.

Who Is Responsible for Debt After Divorce?

Once your divorce is over, and you’ve either agreed how your debts will be split up or the court has decided for you, that should close the discussion of who’s responsible for what. Well, not to burst your bubble, but occasionally that’s not the end of the story.

The reason is that creditors generally aren’t bound by the terms of your divorce judgment. So, let’s say the divorce judgment states that your now ex-spouse is supposed to be paying off a jointly held credit card. But at some point your ex stops making payments. There’s nothing to stop the credit card holder from setting its sights on you to make up the shortfall. Of course, you can go back to court to seek relief against your ex, but in the meantime your credit rating is taking a hit.

The best way to avoid this is to liquidate assets at the time of divorce to pay off joint debts as best as you can, and refinance any remaining debts in the name of the spouse who will be responsible for payment. This may not be possible with every debt, but to the degree you’re able to do it you’ll save yourselves from possible headaches down the road.

If your name remains on any account your former spouse is supposed to be paying, keep tabs on the account to make sure your ex is making timely payments.

Of course, personal debts you incur after your divorce is over would be your responsibility.

Does Bankruptcy Enter Into the Mix?

It can. But bankruptcy is a specialized area in the law. So you definitely need to consult with a bankruptcy attorney if you feel your debt situation is dire enough to warrant taking that road.

There are several things you should inquire about. For instance, you’ll want to know whether only one spouse should file for bankruptcy, or whether it would be more beneficial for both spouses to file, either individually or jointly.

You’ll also want information on which type of bankruptcy to pursue—Chapter 7 or Chapter 13. Each has its own benefits and drawbacks. And you’ll need guidance on whether to file for bankruptcy after divorce or before.

You can check Nolo.com for more information on bankruptcy and divorce.

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