What Happens to Debt When You Divorce?

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When splitting up debt during a divorce, you have a lot of options both legal and personal.

Going through a divorce is never easy. During this process, there are many different factors to consider from splitting up assets to making new living arrangements and so on. One question you’ll be faced with early on is who will take responsibility for existing debt.

If you accumulated debt together in your marriage, separation laws in your area will help determine how that debt gets split up on the surface. However, everyone’s situation is unique and there are different routes you may want to take when it comes to handling the debt you might be responsible for post-divorce.

Here’s a full guide on how splitting up can affect your debt.

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Key Steps Required to Split Up During a Divorce

When you’re getting divorced, there will be a lot of back and forth communication regarding child custody, splitting up your assets, and debt. It’s not always possible, but one of the best times to work out a financial agreement is before going to court and finalizing a divorce settlement.

“Ideally, debt is split in a divorce through mutual agreement rooted in common sense well before you get the courts involved,” said Jackie Sullivan, a Certified Divorce Lending Professional (CDLP) at Geneva Financial who advises multiple divorce attorneys and their clients.

“Mediators can be extremely beneficial in helping to find solutions that make good financial sense to both parties to the separation and/or divorce even when you get along with your estranged spouse — and especially if you don’t.”

There are two types of divorce to keep in mind which could impact the process you take to handle debt. An uncontested divorce is when both parties come to an agreement on all terms of the divorce then file papers with the course.

A contested divorce is when both parties don’t agree on various terms.

One of your first steps should be to determine whether you and your former partner have an uncontested or contested divorce. If it’s contested and you’re having trouble agreeing on certain things, you can bring in a mediator who can help listen to both sides and smooth out communication.

If that doesn’t work, arbitration is the next step which involves getting a private judge to hear both sides and rule in someone’s favor.

The final option is divorce proceedings in court where you may want to work with a lawyer and honor the final ruling from a judge according to the divorce decree.

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When Am I Responsible For My Ex-Spouse’s Debt?

Divorce makes it very tricky to determine who’s responsible for which debt. One way to get some guidance is by referring to your state’s law on the matter. There are community property states and common law states.

Currently, 41 states are ‘common law’ property states which means the assets and debts you acquire during marriage are yours unless your spouse’s name is also on the title or legal document. This means if you take out student loans in your name while you’re married but get divorced later, you would likely be solely responsible for that debt in a common law state.

The nine remaining states (including Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin) follow ‘community property’ laws where any assets or debt accumulated during marriage are the joint responsibility of both parties via a 50/50 split.

Aside from state laws, when you have debt with a private creditor, they may have their own view of when you could be responsible for your ex-spouse’s debt.

“In most states, a court-ordered settlement and divorce decree will not override a creditor’s right to collect on a debt,” said Sullivan. “This means if both parties are listed or co-listed as obligators, they will still have an obligation to repay the debt regardless of a course order. For that reason, it is crucial that a spouse either work with the creditor prior to the final decree to determine how they can settle the debt or remove their name from it.”

Every debt is different, so here are some options to keep in mind when dealing with splitting up a specific type of debt when you’re divorcing.

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Mortgage Debt

More than 68.5% of Americans own a home and many have mortgage debt. During the divorce process, the first thing to decide should be who gets to keep the house. If you both agree to sell it, you can get out of mortgage debt this way and split any profits.

On the other hand, if one of you prefers to keep the house, the best solution is to refinance the property to remove the other person’s name from the loan. Mortgage refinancing is very common, and it gives you a brand new loan (with a new lender) usually at a lower interest rate.

While the main purpose of refinancing is to help you lower your interest rate and save money on your mortgage, it can also get rid of your old mortgage terms. This includes any financial responsibility from your ex-spouse if he or she is no longer on the mortgage title for the home.

If there is equity in your home, consider doing a cash-out refinance which will allow a portion of the equity to be paid out to both parties. As a result, the departing person can still receive their share of equity on the home that was once shared during the marriage.

Auto Loans 

A joint auto loan is another type of debt you may have when going through a divorce. Removing someone’s name from the loan is not that simple since both parties’ finances were factored in when you originally purchased the vehicle.

You can always sell the vehicle and split any profits made from the sale. Be sure to research the car’s value before trying to sell it to ensure you’ll receive a fair price.

If you wish to keep it, however, final ownership of the car will be settled in your divorce decree. Whether you or your former spouse get to keep the car, it’s important to contact your lender since both of you still may be responsible for repaying the loan in their eyes.

Let’s say you get to keep the car since that is what you plan on using to get to work and take your kids back and forth to school. If both of your names are still on the loan and your ex does not pay his or her portion of the monthly payment, this could hurt your credit or even result in the vehicle getting repossessed.

To avoid this, you can refinance your auto loan and remove the other’s person’s name from the loan. Refinancing your auto loan means you’ll basically need to reapply for financing and produce all your financial documents including pay stubs, name of employer, Social Security number, divorce decree (if relevant), and remaining balance on your existing loan.

With car loans, there’s also the option to get a cosigner if you feel you won’t qualify to refinance the vehicle on your own. A cosigner’s name does not have to be on the title of the vehicle. Rather, their financial and credit information can help you secure the new loan while also making them liable for any payments you might miss.

Finally, make sure the person who gets taken off the auto loan also gets their name removed from the title as well. The car title is separate from the auto loan but it can be easily removed once you visit the DMV. In some cases, both parties are required to release one person’s name from the title. Be sure to handle these things sooner than later during the divorce settlement.

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Credit Cards

A lot of couples use credit cards, but the card account is usually just in one person’s name. When you and your spouse have a joint credit card, you are just as liable for any debt on that card as they are. Depending on where you live, the court will use either community property or common law property to determine who’s responsible for the marital debt.

States that follow community property rules will hold both parties responsible for the debt incurred during the marriage.

Under common law standards, the court will only hold you responsible for credit card debt that’s in your name, joint credit card debt (in both you and your spouse’s name), and credit card debt from an account you cosigned for your spouse.

A divorce decree will clearly explain who is responsible for which credit card debt. However, in the creditor’s eyes, whoever’s name is on the debt is responsible. This means you’ll still want to have a plan to pay off credit cards you’re responsible for after the divorce.

You can also consolidate your debt by taking out a personal loan to combine all your credit card balances. This can also help you save money on interest and make just one payment each month instead of multiple ones.

Student Loans

Any student loan debt you took out in your name before getting married will be solely your responsibility after a divorce. If you or your partner took out a student loan while you were both married, things can get tricky with a divorce.

The court will consider certain aspects of the situation like the fact that the person who took out the student loan might not have been the higher earner in the marriage. At the same time, the loan could have helped them complete a program and get into a specific career. This job likely provided income that benefitted the other partner and the household as a whole. So who’s actually responsible for the student loan debt?

Again, it will likely all come down to the state you live in and whether the common law or community property law reigns supreme. Also, the court will consider what the loan funds were exactly used for, if the person earned a degree while married, and what each spouse’s earning power is or was.

Medical Debt

Dividing debt containing medical bills will depend heavily on when it was incurred. If you and your partner were legally separated and they had a medical procedure that resulted in a bill, you may not be responsible for it depending on the state you reside in.

If you’re in a community property state, your medical bills will be considered community debt or shared debt and divided equally. Other states may not do a 50/50 split. Instead, a court in a common law state will order who pays which bill on a case-by-case basis by weighing each unique situation.

When you have kids, the court will also take the best interest of the child into account when determining who is the best person to pay for existing medical debt.

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What Can I Do to Protect Myself Financially?

Divorcing can be financially draining. As you navigate through the process of splitting up your debt, it’s important to also protect your current and future financial situation as well.

“People want their divorce to be done quickly and cheaply so many think they can do it themselves and end up paying more once the final judgment is given,” said Christen Ritchey, a lawyer and founding partner of Johnson, Ritchey & Feldman law firm. “The best way to avoid a financial crisis post-divorce is to hire competent counsel to give legal advice at the outset and utilize a neutral financial expert.”

Ritchey added that working with an experienced lawyer for a contested divorce can help you get the most efficient results and avoid having to go back to court post-judgment.

Sullivan warns to protect yourself financially even if you’re in a happy marriage right now.

“Be careful what you put your name on and keep an excellent credit profile,” she said. “I also recommend that each party have at least one bank account and maybe a joint account as well.”

Other ways to protect yourself would be to make sure that your name is also on any savings accounts so the funds could be split 50/50 in the case of a divorce.

Furthermore, a prenuptial agreement is an option regardless of your current level of wealth. They can be very helpful in clearly defining the intent and agreements between both parties and the division of assets during a split. However, a prenup can be disqualified if it is based on incomplete information so make sure you pay a qualified professional to carefully review your agreement if this is something you decide to do before marriage.

Bottom Line

Divorces happen, and while there are clear laws in place to help determine how your joint debt will be split, you also have some room to decide what’s best for you. Amicable mediation with your partner is always worth a try, but you should also do what you can to protect your finances at all times. Consider refinancing debt to make sure you are the one who’s solely responsible for it. Then, make a solid plan to manage your finances and continue with debt repayment in your new situation.

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About The Author

Choncé Maddox

Choncé Maddox is a Certified Financial Education Instructor (CFEI) and personal finance freelance writer. Her work has been featured on LendingTree, CreditSesame, and Barclaycard. She earned a Bachelor's degree in Journalism and Communications from Northern Illinois University and resides with her family in the Chicago area.

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