Debt and Divorce: Who’s Responsible for What

One of the most difficult situations in life is going through a divorce. I know. I’ve been there. Fortunately, my divorce was mostly amicable with my ex and I dividing the assets and the debts without too much fuss.

Unfortunately, that’s not always the case when dealing with how to pay off debt after divorce. Understanding divorce and debt responsibility are very important if you don’t want to get stuck paying for more than your share — or seeing your credit destroyed by the process.

Here’s what you need to know about divorce and debt responsibility before finalizing your paperwork.

What’s Considered Marital Debt?

First, it’s important to understand what’s considered marital debt. In most cases, marital debt is just what it sounds like: debt acquired during the marriage.

But, even in that case, you might be surprised to find out that debt acquired by one partner isn’t always considered marital debt. For example, if your partner opens a credit card account, and uses it to run up bills that aren’t shared expenses, that might not be considered marital debt.

Of course, where you live also matters a great deal, since divorce and debt responsibility are often set forth by state law. So, even though personal debt not used for things like food, shelter, and child-related costs might be acquired during the marriage, if you didn’t benefit from it, you might not be responsible for it.

In the end, your divorce settlement, as approved by a judge, is going to determine how your assets and debts are divided up. Things like assets, who’s been providing support, how custody is arranged, and other factors will go into the decision creating a settlement.

Cosigned Marital Debt

One exception to this rule, though, is if you cosign on your spouse’s debt. You might not have benefitted from a credit card shopping spree, but if it was accomplished using a joint credit card — one with your name on it as a cosigner — you’re accountable for the debt.

The same is true if you refinance your spouse’s student loan debt as a cosigner. Your ex might have gone to school and acquired the debt before you were married, but if you cosign on a student loan refinance, you’re considered just as responsible for the debt.

It’s important to note that creditors aren’t part of the divorce decree, and if you’ve accepted responsibility for the debt by being a joint signer on it, you’ll ultimately also be held responsible for it in the end as well.

Community Property States

Another exception to the rule regarding personal debt acquired during a marriage comes to those living in community property states. These states include:

• Arizona
  
• California
  
• Idaho
  
• Louisiana
  
• Nevada
  
• New Mexico
  
• Texas
  
• Washington
  
• Wisconsin
  

Alaska is an opt-in community property state, meaning that couples can sign an agreement making their property community. As you might imagine, though, there aren’t a lot of couples interested in signing this type of agreement.

For the most part, in community property states, you’re responsible for your spouse’s debt acquired during the marriage, even if it’s in their own name and wasn’t used for the benefit of the couple or household. However, debt acquired before the marriage doesn’t usually “count.”

Additionally, even in community property states, a judge can determine how to split up the debt responsibility based on factors that include how and when the debt was acquired, and other factors about how the finances will work after the marriage.

Can You Decide How to Divide Debts on Your Own?

One way to avoid some of the unpleasantness of letting someone else decide your fate is to hash out divorce and debt responsibility on your own, with your soon-to-be-ex. You can use your lawyers to come to a collaborative agreement, or even use a mediator to help you work through it.

My ex and I sat down at the kitchen table, looked at everything, and figured it out on our own. We had a couple credit card balances at the time, a joint car loan, and a joint personal line of credit. We used shared assets to pay off the credit cards and closed the joint credit card we had together. Then I agreed to pay on the personal line of credit, since I’d used it more for business expenses, and the car loan, since it was on the car I drive.

Even though we filed for divorce in a community property state, because we had divided everything ahead of time, all we did was get an attorney to write up what we wanted and submit it to a judge who approved it.

However, in order for this to work, you need to have an amicable relationship with your ex so that you can divide things up in a way that makes sense, and that you’re both comfortable with.

Now, let’s dive a little bit deeper into how divorce and debt responsibility works.

Is Credit Card Debt Shared in Divorce?

Depending on the situation, credit card debt might be divided up, no matter whose name is on the debt. This is because, in many relationships, credit cards are used in ways that benefit both partners or the household. However, as mentioned above, if you can show that your spouse used a credit card that was only in their name for their own benefit exclusively, you might be able to avoid responsibility.

When possible, it often makes sense to pay off credit card debts before the divorce settlement. If you have shared savings or some other means of paying down the credit card debt, this can reduce the number of encumbrances on both of you. Having credit cards paid off ahead of my divorce just made things easier — especially since we were able to close a shared account.

Is a Spouse Liable for Business Debt?

Once again, business debt liability depends a great deal on the situation and the state. If you live in a community property state and your spouse started a business during the marriage, there’s a good chance you’re going to be held liable for the business debt if your ex doesn’t pay the bills.

On the other hand, if you don’t live in a community state, and the business is entirely in your spouse’s name, you might not bear any liability. Another option is to sign a prenuptial or postnuptial agreement setting forth which assets should be considered separate.

If you and your spouse were business partners, it’s a good idea to settle the business and dissolve it when you divorce. My ex was named a member of the LLC responsible for the bulk of my business. When we divorced, we went through the process of dissolving the LLC and making sure any outstanding obligations were taken care of. I then formed a new company on my own.

How Can You Protect Yourself from Your Spouse’s Debt?

In many cases, the best defense is to make sure that you don’t agree to shoulder their debt during the marriage. You can gain a measure of protection by limiting your joint debt and making sure each of you has individual credit cards.

Additionally, when it comes to “equitable distribution,” courts look at the behaviors of the parties. If you can show that your ex has tried to hide marital assets or run up debts in secret, you might be entitled to a larger portion of the assets — and declared not responsible for more of the debt.

However, for debts you’re listed as a cosigner on, there’s really no way around it. That’s why it’s a good idea to refinance debt into the responsible spouse’s name when possible. If you decide that one person will keep the house, try to have the loan changed or refinanced to reflect that. Unfortunately, this can be difficult to do. In a lot of circumstances, it can make more sense to sell the joint asset and divide the proceeds.

Because there was only a year left on our joint car loan, we didn’t try to refinance it or have my ex’s name removed. He trusted that, because I was driving the car, I’d make payments on the loan — and I did. But if I’d paid late one month or missed payments, the lender could have gone after my ex for payment and his credit could have been impacted.

Does Divorce Affect Your Credit?

Divorce can impact your credit, though, especially if you didn’t build credit in your own name during the marriage. Maybe you have one joint credit card, but all the other cards are in your spouse’s name. You’re an authorized user, but that hasn’t really helped your credit score. The joint card might impact your score, but now that the marriage is ending, you’ve closed the joint account, reducing your credit utilization and the accounts you have. Being an authorized user doesn’t help build your credit score the same way.

You might not have thought much about your credit during the marriage. As an authorized user on a credit card, you could still use it, so you had access. However, now you have to stand on your own, and you might have to work to raise your score, opening a credit card in your own name, and hoping you can access other credit products.

Another way divorce can impact your credit has to do with what your partner might do. If your partner runs up a huge bill on a shared card, that can affect your credit utilization. That’s one reason it’s so important to close shared accounts and remove your ex as an authorized user on your credit cards as quickly as possible.

Finally, a judge might say that your ex is responsible for cosigned debt, like a mortgage payment, student loan refinance, or car loan. If your name is still on the debt and your ex misses payments, the creditor can still come after you for payment and report you to the credit bureaus for delinquency. That’s why it’s so important to try to get your name off any debt that you’re not directly responsible for paying.

Does Divorce Show Up On Your Credit Report?

Your divorce doesn’t show up on your credit report. In fact, both my credit and my ex’s credit stayed pretty much the same after the divorce. However, this was largely due to the fact that we both had our own credit cards and other credit accounts. We both took a slight hit on our credit scores by closing the joint credit card, but with all our other cards paid off, there really wasn’t much of an overall credit impact for either of us.

How are Assets Divided in Divorce?

States that aren’t community property states are called “equitable distribution states.” This doesn’t mean, however, that assets and debts are split down the middle. While a 50/50 split is fairly common, judges are more likely to consider a number of factors when divvying up the property, including:

• Earning power of each spouse
  
• Current financial situation of each spouse
  
• Likely financial needs for the future
  
• Value of separate property owned by each
  
• How each person contributed to gaining the marital property
  
• Liquidity of the marital assets
  
• Whether each spouse contributed to education or earning power of the other
  
• Custody division
  
• Obligations related to alimony and/or child support
  
• Any prenutpial or postnuptial agreements
  

It’s worth noting that most judges won’t take into account infidelity or even domestic violence when looking at the division of assets. However, if someone’s been hiding marital assets, or if someone raided a shared savings account during the divorce process, that might be taken into account when considering how to divide things up. If one spouse is clearly trying to “stick it to” the other in some way, a judge may award them a smaller portion of the shared assets.

For the most part, though, divorce courts only step in if you can’t figure out division of property (and debts) on your own. Divorce and debt responsibility and asset division are only matters for a judge when it comes to items you can’t resolve on your own.

Your Best Bet: Figure It Out Together

If you are unable to get out of debt before divorcing, it’s best if you can work through the division of debt in an amicable way. Setting aside hurt feelings can be hard, but if you both have lawyers, or if you use a mediator, you can collaborate on a solution that is more likely to allow you both to move on financially. Make sure you get your fair share, but don’t draw out the process unnecessarily. The longer you fight over the assets, the richer the lawyers get — and the less you’ll both end up with in the end.