Splitting assets is a priority for married couples, but what happens with debt during a divorce is just as important, with financial implications that last for years.
Every divorcing couple is in a unique financial situation and in most states dividing debt is worked out to fit. In the 41 states that have “equitable division,” sometimes called “common law” division, courts consider a couple’s finances when dividing debt incurred together. Debt incurred separately is the responsibility of the spouse who incurred it.
Equality – assets and debts being split equally – isn’t so much the goal, as is fairness and ability to pay. A spouse who has a higher income, or is awarded more property, may also be assigned more debt.
In the nine “community property” states, debt incurred during the marriage is divided 50-50, though some of these states also have restrictions or other laws that make it more complicated. Also, courts may consider assets and debts as total “values,” meaning while assets and debts are divided 50-50, each individual piece may not be.
The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin, as well as Puerto Rico. In Alaska, South Dakota and Tennessee, residents can opt in to some form of community property.
If dividing debt during a divorce is going to work out, financial information must be fully shared with both sides. Ideally, during your marriage financial decisions were made jointly. Even if they weren’t, as you sort out debt during your divorce, it should be a team effort. Doing it right will mean less financial damage afterwards, including to your credit score and credit report.
Different types of debt are handled differently during divorce. We’ll go into more detail on:
We’ll also look at options if dividing debt during the divorce isn’t going well, or if you are experiencing debt that’s beyond your means to handle after a divorce.
Responsibility for debt incurred once a couple separates, but before a divorce is final, differs by state.
Some states don’t take separation into account, and debt incurred is handled the same way it would be if they weren’t separated until the divorce decree is final.
In other states, debt incurred once the couple separates, is considered differently.
If the debt is incurred on an individual account, it’s usually that individual’s responsibility, unless they live in a community property state that may not recognize separation.
Joint accounts, however, can be a problem. Creditors want to be paid, and the only thing they consider is the name on the account. A separation, or even divorce, doesn’t matter. If your name is on a credit card, the creditor considers you responsible for paying it.
If your spouse is an authorized user of a credit card, but you are the primary user, you can contact the credit card company and have them removed. If you are an authorized user and your spouse is the primary user, you can have yourself taken off.
If you are separating, it’s a good idea to find out what the law is in your state. If you don’t want to be responsible for debt incurred by your spouse during separation, be sure not to cosign a loan or get any joint accounts.
In most states, you are responsible for all credit card debt incurred in your name in a divorce. You will not be responsible for your spouse’s credit card debt if it is in their name only. In community property states, if the card originated during the marriage, you are responsible for 50% of the debt.
In most states, in a divorce, both parties will likely be responsible for credit card debt on a card held jointly. This applies even if one spouse was the one who used it the most, or made the payments. A judge, however, may decide that one spouse is able to pay more than the other.
In community property states, each party is responsible for 50% of the debt from a joint credit card account.
In all cases, when a credit account is held jointly, you can’t remove yourself from the account. During a divorce, you should make sure all joint credit cards and lines of credit are closed. An ex-spouse can transfer balances from their own accounts to joint accounts or run up the balance, leaving you liable.
A spouse may cosign for a credit card when the primary user can’t get an account on their own. This means that the cosigner takes responsibility if the primary user can’t pay. The debt on the card will be treated like all other accounts in community property states, and split equally. In common law states, a judge has more discretion.
You can remove yourself as co-signer by asking the primary user to allow you to, although the creditor may not agree if the cosigner still does not qualify.
If the house is in one person’s name, in most cases, the court will consider the couple’s financial situation, why it’s in one person’s name, and more, when figuring out who will be responsible for the mortgage, or how it will be split.
In a community property state, the house, even if it’s in one person’s name, may be considered property, for a variety of reasons. It’s best to hire a lawyer to help with this if you’re in that situation.
When a lender agrees to a mortgage with two people, it considers their incomes and assets jointly, so one person can’t simply be removed from a mortgage.
The title to the home and mortgage are not the same thing. The names on the mortgage are who is responsible for paying the loan. The name on the title is who owns the home. If you still have a mortgage, this will be the mortgage lender as well as you, and likely your spouse. If you are removed from the mortgage, make sure your name is also not on the title.
A title transfer can be done at your county deed office and must be signed by both parties. The person who no longer holds title will not benefit if the house is sold and has no other claim on the house. But it does not remove their name from the mortgage. If your name is on the title and your spouse doesn’t make the payments, you can be liable. It may also still show on your credit report.
If both parties are on the mortgage, the cleanest solution is to sell the house and split the money. Even if you’re advised to keep it in place for the good of the children, selling and splitting is usually the best strategy because it allows both parties to start over with a clean slate.
While you wait for the home to sell, you need to work out an agreement with your ex on making payments.
“On a temporary basis, you should try to reach an agreement on how much each person will pay toward the mortgage in order to protect both parties’ credit,’’ says divorce attorney Regina A. DeMeo.
If a court decides that one of the parties in the divorce will keep the home, or if one wants to keep it, they will usually have to buy out the other’s equity and take over the mortgage.
“If one party wants to keep the home — and the other party agrees — contact the mortgage company to have the uninterested party’s name removed from the loan agreement,’’ said Chris Scott, the founder of Chicago’s Opulent Credit Builders. “If the mortgage company doesn’t want to remove it, you can refinance the home without the other name being on there.’’
Auto loans that are in both names can be a real problem in a divorce. In most cases, one person can keep the car and will make payments.
“These are hard,’’ Scott says. “What you really tend to see is the other party not paying and somebody gets stuck.” And, Scott says, “Everybody’s credit gets messed up.’’
If one person doesn’t pay, if the other’s name is on the loan, they’re responsible for late fees, default or collection costs.
Options to make sure that a car loan is paid after divorce include:
DeMeo says if you can’t make payments and can’t afford to pay off the balance, “Then divorce is often a time when people need to trade in expensive cars for something more manageable, given their new budgets.”
As with a home, the title of the car and the auto loan are separate things. Be sure ownership is transferred to whoever is keeping the car and remove the other name from the title. This is done through a title transfer at your state’s Department of Motor Vehicles, signed by both parties. The car’s registration, and any violations, are the responsibility of the title holder and if you’re not keeping the car, you don’t want to be liable.
In most states, the court will consider whether the couple was living together (or if there was a legal separation) when the medical debt was incurred. Debt from an emergency or other necessary medical procedure will likely be considered differently than elective surgery or an unnecessary procedure. The judge will make a decision based on the individual divorce case. This goes for medical debt involving a child’s illness, birth or emergency as well.
In community property states, medical debt incurred during marriage is split 50-50.
If an ex-spouse files for bankruptcy after a divorce, it could affect you.
Since divorce doesn’t overrule a loan agreement, any joint credit is still your responsibility. So, when an individual files for bankruptcy to eliminate a joint debt, the debt itself isn’t wiped out, just that person’s liability for it. The creditor can pursue the debtor who didn’t file bankruptcy for the full amount.
If your ex files for bankruptcy, keep an eye on your credit report, since it could erroneously show up there.
If you file for bankruptcy, it does not eliminate court-ordered child support and alimony payments you are required to make as part of your divorce decree.
If an ex doesn’t pay a joint debt as required by the court, your biggest immediate priority should be to protect your credit. This means paying the debt yourself if you can afford to. If your name is on the loan or credit card, you are responsible — period. Lenders likely aren’t aware there was a divorce and won’t be sympathetic to anything other than repayment of the loan.
Paying, in the short run, will protect your credit.
Keeping records of your payments will allow you to ask the court to enforce the decree you’re your ex pay, as well as reimburse you for the payments you made.
The best strategy to keep debt being a problem after a divorce is to pay off debt your debt before finalizing the divorce. If that’s not possible, agree with your spouse to split obligations, so that one of you is making the car payment, for instance, and the other is paying the mortgage.
Lenders, credit card companies and others are not parties to the divorce decree. They just want to be paid. If your name is on the account, you are on the hook regardless of what your divorce decree says.
The best solution to avoid issues with dividing debt during a divorce is to dissolve joint accounts before going to court. If possible, refinance the house, car and other loans in one person’s name.
Cancel shared credit cards and pursue credit card balance transfers to have the debt on cards in each person’s name.
This is where maintaining a civil relationship with your ex pays off. It’s much easier to sort out finances and divide debt during a divorce if you’re not in fighting mode.
Also, be aware that divorce proceedings are fertile environments for identity theft. Be careful to safeguard information such as your Social Security number.
If you believe your debt situation will be complicated during a divorce, you may want to consider speaking to a professional, like a credit counselor or lawyer who specializes in family law. These professionals are familiar with the ins and outs of debt and divorce, and likely have seen situations similar to yours many times. They also are familiar with the laws in your state and the nuances of dealing with splitting debt.
If you believe that you will have trouble managing your finances after a divorce, or are experiencing financial hardship because of a divorce, you may want to consider nonprofit credit counseling. A credit counselor can help you explore options to manage debt.
The solution may be as simple as helping you work out a budget. They may also suggest a debt management plan. With debt management, the counselor asks creditors to offer lower interest rates and fees on your debt. You pay a nonprofit debt management company, like InCharge Debt Solutions, a fixed monthly payment and the company pays down your debt. These programs are accredited through the National Foundation for Credit Counseling, come with a monthly fee of $40 and take 3-5 years to complete.
A counselor may also suggest the Less than Full Balance program if you qualify. A traditional debt management program won’t reduce balances — although it does make payments lower because of lower interest and fees — but the Less than Full Balance program can reduce a balance by 40%-50%. There is no interest charged on payments in the 36-month program. There are some restrictions.
An InCharge Debt Solutions counselor can help you decide if debt management or the Less Than Full Balance program is right for you, or help you explore other debt relief options.