Debt and divorce
When you get divorced, most couples will have to evenly divide their marital assets, but what about debts?
Ideally, individuals would walk away from the marriage shouldering the responsibility for any debts incurred in their own names. But as most people going through a divorce know, things don’t always work out according to plan.
How your debt will be divided should be laid out in a divorce decree. A divorce decree is your judge-approved settlement agreement. It is a court order that officially details how you and your ex will deal with things like your home, parenting concerns and spouse support, as well as any investments, bank accounts and debts.
Marital debt refers to any debt that was incurred during the marriage.
Regardless of who was making the payments during your marriage, you’ll generally both be responsible for any debt that was accumulated on a joint credit card while you were still together.
How is debt divided in divorce?
A handful of states have community property laws. That means that anything acquired over the course of your marriage is equally shared by both parties — and that includes your debts.
Under community property laws, the only things that would be considered separate property is property held in only one spouse’s name, including anything they owned before marriage, were given as a gift or inherited.
The states that have community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
All other states tackle divorce from an equitable distribution perspective, meaning if you can’t settle who gets what, a judge will step in and use their discretion to split things fairly.
Different types of debt are handled differently, but a good rule of thumb would be to assume that any debt in your name will be allocated to you.
Mortgages work a little differently and can be challenging if one party isn’t able to buy the other party out. Your best option here would be to sell the house and split the proceeds.
As for medical debt, community property laws will split that 50/50. Equitable division laws will factor in whether you were living together at the time the debt was acquired and whether the court’s decision will impact your children.
Divorce and debt responsibility
Regardless of how the legal system in your state handles debt in divorce, if your name is on a debt, the bank will still view you as responsible for it.
From the bank or credit card company’s perspective, legally, credit card agreements or loan contracts will supersede a divorce decree.
Things can get a little complicated when one ex-spouse has been ordered to make debt payments on a loan that isn’t in their name or held jointly.
Based on how property is divided, it may be up to your former spouse to make payments on a car loan that was taken out in your name. But if they refuse to make those payments, it’s your credit score that will be affected.
You can bring them to court to take action against them, but in the time it takes to get your complaint before a judge, your credit will probably already be in the toilet.
And it’ll be reflected in your credit report for years to come.
If most of your joint bills are in your name, you may consider including an indemnity clause in your divorce agreement, which essentially outlines who is responsible for the debt and protects the other party from having to pay it.
An indemnity clause will also ensure you can sue your former spouse if they fail to pay their court-ordered debts in the future.
How to handle the divorce bills
Your best bet is to try to pay off any debts before your divorce is finalized.
Of course, that’s not always possible. So in that case, make sure you’ve got all your joint accounts closed up so you don’t get dinged for any of your former partner’s post-divorce purchases.
If your former spouse can’t manage the debts they were assigned in the divorce settlement, you may find creditors coming after you to make payments.
Your best option here is to pay off the debt if you can afford to, keep a record of it and notify family court to ask for assistance getting reimbursed from your ex. That way, you avoid getting your credit score in a bad spot while you wait for things to move through the court.
It doesn’t seem fair. It probably isn’t.
But that’s why you should try to liquidate as many assets as possible when you get divorced. Pay off as many joint debts as possible and close your joint accounts.
Sometimes walking away with nothing is better than dealing with a damaged credit score and creditors hounding you.