What You Need to Know About Dividing Debt in a Divorce
Debt in a divorce can be a complex asset to allocate. Here’s everything you need to know about how to divide debt in a divorce.
What is Divorce?
Divorce dissolves a marriage or legal partnership. After a divorce, the state considers each spouse legally single. Both spouses may remarry or pursue another domestic partnership after divorcing. Spouses should distinguish divorce from legal separation. Legal separation does not dissolve the marriage or partnership but can allow for child support and visitation orders in court, similar to divorce.
Related: How Debt Is Divided in a California Divorce
Does Every State Divide Debt the Same?
States may divide assets in two ways:
1. Equitable distribution
Equitable distribution divides a marriage’s assets based on what a judge considers fair for both parties, which may not be to a party’s satisfaction.
2. Community Property
All marital assets are eligible for a 50/50 split between the parties.
How does Equitable Distribution Handle Debt?
Equitable distribution does not split debt between the parties, and each party who incurred debt separately from the marriage is still responsible for that debt. The parties must repay their joint, accumulated marital debt in an equitable distribution state.
One spouse may take responsibility for some marital debt. For example, if a spouse had an affair and accumulated credit card debt through a joint card when pursuing the extramarital relationship, the judge may order the cheating spouse to pay off that debt.
Ultimately, the judge will distribute the specific marital and individual debt in an equitable distribution state.
Related: How Bankruptcy Affects Child Support
How does Community Property Handle Debt?
Like equitable distribution states, community property still asserts a difference between separate debt and marital debt. The spouse’s debt incurred before the marriage is still responsible. However, the parties’ joint marital debt becomes “community property” regardless of whether one spouse accumulated the debt. Thus, the parties must split that “community” debt.
How to Mitigate Divorce Debt
The spouses may prepare to divide assets before the divorce hearing. The parties should create a list of all debts (separate and marital) accumulated before and during the marriage.
The spouses should attempt to pay off the debt before finalizing the divorce. If spouses cannot do so, they should dissolve joint bank accounts and refinance other assets to pay off some debt incurred during the marriage.
Parties should cancel joint credit cards, divide the accumulated debt and transfer it to each person’s name. If spouses do not allocate debt in this manner, a spouse may stop paying their share of the debt. Creditors may pursue the other spouse for payment.
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