Dividing Debt in Divorce: What You Owe (And What You Don't)

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Divorce can be emotionally draining, and it can also hurt families financially. Financial implications of divorce can last for years, long after the divorce papers have been signed and the legal fights are over. While many families are focused on issues of custody, alimony, and other arrangements, there are financial issues to consider as well. Most people know they will have to divide assets, but what happens to debt?

During the divorce process, you will need to determine who will be responsible for any jointly incurred debt, as well as how to handle individual debt. First, depending upon your circumstances, your attorney may advise you to stop using joint credit cards or accounts as soon as possible. Incurring more joint debt during a divorce will make everything more complicated. Next, look at your current debts and decide what you owe, and what you don’t.

What You Owe: Credit Cards and Loans

Get a copy of your credit report and take a look at the list of financial liabilities. Make sure you recognize all of the accounts, then make a list of which accounts are in your name, and which are joint. This will give you an understanding of how much total debt you have so you can begin to make a plan.

If you have applied for credit–whether for a credit card or a loan–in your name only, you are the primary account holder and that debt will remain in your name. After a divorce, you will be responsible for accounts that are only in your name, even if your spouse has racked up debt on those accounts.

If you have joint accounts, you and your spouse are both responsible for the debt going forward. How you will pay off any debt should be determined in your divorce settlement. However, the divorce settlement doesn’t matter to creditors, so even if you have an agreement that your former spouse will handle one account, it doesn’t mean creditors from that account won’t reach out to you for payment or account issues. This can also be an issue with debt in your name. A court could order your spouse to pay a debt that is solely in your name, but until it is paid you will still be financially responsible to the creditor, and creditors will reach out to you if your spouse fails to make payments. In other words, your divorce judgment can determine who is responsible for each of your debts and obligation; however, your divorce judgment will not affect the creditors.

In the end, creditors care about who owns the debt, and about getting paid. Ideally, your spouse will stick to the terms of your the divorce settlement/judgment.  But, in the event that your spouse fails to meet his/her financial obligations, you may have some recourse through the court. Talking with a lawyer about your finances during the settlement process can help give you a better idea of how paying debt will work going forward, and what your rights are.

What You Owe: Real Estate Debt

In most cases, the party who takes the property in a divorce will be required to pay the mortgage or any other debt related to the house. That doesn’t mean the other party is off the hook financially. Divorce settlements cannot void contracts with financial institutions, so if you took out a mortgage jointly, it remains both parties’ responsibility. To remove joint responsibility, one party could refinance the mortgage in only their name.

If neither party chooses to keep the house, it can be sold to pay off any remaining debt. Keep in mind that you may have to pay a penalty to your lender for terminating your mortgage early, and there may be tax consequences involved n the sale of a home.

What You Owe: Auto and Student Loans

If you have co-signed a loan of any kind with your spouse, and they are keeping the item the loan was for, you should try to release yourself from the loan. Say they purchased a car, or decided to go back to school, and you co-signed the loans. Get out of them if you can, or you’ll end up on the hook down the line for debt you’re not benefiting from. If you have co-signed your children’s student loans, you will probably remain jointly responsible. Again, talking with a lawyer can help you determine the best course of action in these situations.

What You Don’t Owe

You may end up being responsible for debt incurred only in your spouse’s name. Whether it’s credit card debt, a personal loan, an auto-loan, a business loan, or anything else, if it’s solely in another person’s name you are not liable – to the creditor.  However, In some cases, courts can order one spouse to pay the other spouse’s debt to make financial situations more fair. If that happens, you are responsible, but until a court orders you to pay your spouse’s debt, you don’t owe a dime.

Financial issues are one of the most complicated parts of divorce, and especially hard to deal with while trying to move on with your life and do what’s best for your family. An experienced attorney can help you understand your options and ease the entire process. At a small law firm, you’ll have the best lawyers personally working with you on your case. Schiffman Family Law offers a free one-hour consultation to any potential client. Schedule a consultation today to come in and talk through your legal and financial divorce questions, free of charge.