Debts Under Property Division Law
Many discussions of divorce focus on dividing assets such as real estate and investment portfolios, but debts are equally relevant to the resolution of property matters. The process of splitting debts during a divorce varies significantly among different jurisdictions. Courts often attempt to distribute debts fairly, taking into account factors like each spouse’s financial situation, who incurred the debt, and whether both spouses benefited from it.
Determining Marital vs. Separate Debt
A central question in debt allocation is whether a debt is considered marital or separate. Most debts incurred during the marriage tend to be categorized as marital obligations. Debts incurred before the marriage are generally treated as separate obligations. When allowed by state law, though, debts incurred during the marriage that solely benefit one spouse and do not serve a marital purpose may also be deemed separate. Conversely, some debts begin as separate obligations but can become marital if both spouses use the resulting goods or services, or if the debt was refinanced and became part of the household’s shared finances.
Credit Card Debts
Joint credit card debt can be challenging when spouses are in the midst of a divorce. Even if a divorce decree states that one spouse should pay off certain balances, creditors typically focus on the initial account agreement and may pursue both spouses for payment if both names appear on the account. Some spouses freeze further charges on joint accounts or opt to remove a spouse from an account if allowed by the creditor. When the debt cannot be cleared quickly, some divorcing spouses enter into an indemnity agreement in which one spouse agrees to repay the other for any expenses or damages stemming from an unpaid debt. This agreement does not prevent creditors from seeking payment from either spouse if both remain obligated on the account.
Medical and Student Loan Debts
In many states, medical bills incurred during a marriage are typically considered marital debts, making both spouses potentially responsible. However, if spouses are legally separated (or have a binding separation agreement), and one spouse incurs medical expenses during that period, the court may find only that spouse responsible, depending on the laws of the state.
Student loans are treated in a variety of ways. For example, if a spouse’s degree was earned long ago and contributed significantly to household funds, some states may be more likely to classify these loans as marital debts. In other cases, especially when the debt is recent or the financial benefit primarily aids just one spouse, that spouse might remain solely responsible.
Secured Debts
Secured debts, such as mortgages or auto loans, factor prominently into many divorces because the lender’s right to repossess affects both spouses’ financial security. If both spouses signed the mortgage or car loan, the lender might be able to pursue either or both for delinquent payments, irrespective of what a divorce decree might say. In some divorces, one spouse may keep the property and refinance to remove the other spouse from the note and deed, but a lender is not required to approve a refinance if the applying spouse doesn’t meet all lending criteria. Alternatively, the spouses might agree to sell the property, apply the proceeds to the outstanding loan, and then divide any surplus or deficit accordingly.
Courts typically consider a spouse’s ability to afford future payments on secured debt when allocating responsibility. If a party seeking to retain a home or car lacks adequate income to manage ongoing expenses, the court may order a sale or a different allocation of property.
Bankruptcy Considerations
Some individuals facing a large amount of debt explore filing for bankruptcy in connection with their divorce. Bankruptcy can eliminate or reduce certain unsecured debts, but it does not discharge obligations for child support or necessarily resolve issues regarding the distribution of marital debts. Divorce decrees often include provisions that one spouse will pay specific shared debts, but in bankruptcy proceedings, these promises may be treated differently. Courts overseeing a divorce sometimes assess whether one spouse might file for bankruptcy and consider how doing so would affect property division and arrangements for financial support. The priority generally given to child support and spousal support in bankruptcy remains a factor in resolving any outstanding obligations.
