Debt and Divorce: From Division to Debt Relief

Divorce presents a chance to begin anew, both in terms of your personal and financial situation.

While a lot of emphasis in divorce agreements is on dividing assets, dividing debt incurred with your spouse also demands careful attention. How you handle marital debt plays a big role in how clean a break you’ll be able to make financially.  

What happens to debt in divorce?

You may be surprised to find that you have responsibility for some debts that were incurred during your marriage, even if it was your spouse that did the borrowing.

This depends on a variety of factors, including whose name was on the account, how the debt was incurred, and where you live. 

Community property vs. equitable distribution states

First of all, you must determine if you live in a state that follows community property rules or equitable distribution rules. This makes a big difference in how debt is treated.

Community property states consider all assets and debts acquired during the marriage to be shared 50/50 between the spouses. In those states, each spouse will be responsible for half of any debt incurred during the marriage, regardless of whose name is on the account. 

There are currently nine community property states. They are:

• Arizona

• California

• Idaho

• Louisiana

• Nevada

• New Mexico

• Texas

• Washington

• Wisconsin

In California, Nevada, and Washington, community property law applies to registered domestic partners, too. 

In Alaska, Florida, Kentucky, South Dakota, and Tennessee you can opt in to community property law.

If you live in an equitable settlement state, the division of debts is open to negotiation as part of the divorce agreement. However, from a creditor’s point of view, the primary responsibility belongs to whoever’s name is on the account. 

Are different types of debt treated differently in divorce?

The type of debt can affect your financial responsibility when you get divorced. While that responsibility is shared equally in community property states, in most states it depends on the specific circumstances.

Here are some examples:

Credit card debt

When dividing credit card debt in a divorce agreement, a judge may look at who did the spending and whether it was for the benefit of just one spouse or the household in general. 

From a creditor’s point of view, though, what matters is whose name is on the account. Even if your spouse has been assigned responsibility for a credit card debt, if your name is on the account you are legally responsible for it. That’s true for any debt.

Mortgage debt

In many cases, mortgage loans are made based on the resources of both spouses. This means both names will be on the loan agreement. You can’t simply take your name off that agreement once you get divorced.

Mortgage debt is guaranteed by the property that was bought with the mortgage. A divorce decree will often assign the asset and the debt to the same person. If they are split, then the cleanest solution is to sell the property and pay off the mortgage.

Even if a divorce decree assigns responsibility for mortgage debt to your spouse, a creditor is all but guaranteed to hold you responsible for it if your name is on the loan agreement. Your former partner would need to pay off or refinance the debt to get rid of the loan that you originally signed up for. In some cases, a court order is needed to make this happen. 

Auto loan debt

An auto loan is guaranteed by the car that was bought with the loan.

Often, the spouse who gets to keep the vehicle is assigned responsibility for the debt. If the debt and the value of the asset are to be split, then the cleanest solution may be to sell the vehicle and pay off the debt.

Here again, if your name is on the loan agreement, the divorce settlement doesn’t make a difference to the creditor. You’re legally responsible for it if your name is on the debt. 

Medical debt

Medical debt that was incurred when a couple was still living together is considered a joint debt in a community property state. In other states, it depends more on the circumstance.

In deciding how to assign such debt, a judge in an equitable distribution state is likely to look at why the debt was incurred. For example, debt incurred as a result of a medical emergency while the couple was still living together is more likely to be shared. So is medical debt incurred on behalf of the couple’s children. 

On the other hand, medical debt that was incurred for elective surgery that benefited one spouse is more likely to be assigned to that spouse. 

Tips/strategies for managing debt in divorce

When you are planning for a divorce, it’s a good idea to make a full accounting of all debts that were incurred during the marriage. This includes both joint and individual accounts.

It’s best if this accounting can be done with the cooperation of both spouses. However, just to be sure, you should check your credit report. This should identify all credit accounts that are in your name, including joint accounts.

Joint accounts can be tricky. Even if a divorce decree assigns responsibility for debt in a joint account to one of you, the creditor on that account can still consider both of you responsible. 

The best solution for joint accounts is to close them as soon as separation is inevitable. 

What to do if your ex doesn't pay assigned debt

A divorce decree may assign responsibility for a debt to your ex-spouse, but that may not be the end of the story. 

If your name is still on a credit card account or loan agreement, it can hurt you if your ex fails to make the agreed-upon payments. In that case, debt collectors may come after you. It also could hurt your credit standing. 

The best solution is to close any joint accounts, or make sure any joint loans are paid off or refinanced.

With loans, often it isn’t practical to terminate the original debt. In that case, you could monitor the account to make sure payments are being made. You may do this by retaining online access to an account, receiving copies of statements or regularly checking your credit report.

You can only close a joint account if both parties agree.

What if your spouse misses a payment that is their responsibility? Depending on your relationship with your ex you might first try contacting them to see if it was simply a one-time oversight. If you have an obstinate ex who refuses to cooperate or who isn’t making required payments, you may need to talk to an attorney about your options. You may be able to head back to court to ask for help enforcing the divorce decree. Or you could make the payments yourself.

Debt relief options after divorce

Once you are divorced and responsibility for debts has been settled, you may find it difficult to keep up with your payments on a single income. Fortunately, there are ways you can get help:

• Credit counseling services. These services are often offered by non-profit organizations. A credit counselor can advise you on budgeting and managing debt.

• Debt settlement. This is a negotiated agreement with a creditor to accept less than the full amount owed and forgive the rest. Creditors may be willing to do this if you’re facing a financial hardship. You can negotiate your debts on your own or you can work with a professional debt settlement company. If you enroll in a program, you’ll make a monthly deposit into a dedicated account, and it typically takes 2-4 years to clear your debts.  

• A debt management plan (DMP). A DMP is an agreement a credit counselor sets up with your unsecured creditors. You’ll pay off your debts in full over 3-5 years. Your credit counselor may be able to negotiate lower interest rates. You’ll be asked to give up credit cards while you’re in the plan. You make a single monthly payment to the credit counselor, and they distribute the money to your creditors.

• Bankruptcy. This is a formal legal process to resolve your debts. Chapter 7 bankruptcy allows you to walk away from your unsecured debts, but you may have to give up some of the things you own. You can’t file Chapter 7 if you can afford a monthly payment. In that case, you could file Chapter 13 bankruptcy. You can keep what you own, but you’ll make a monthly payment for 3 to 5 years. The court will decide how much of your income you can keep for necessities, and the rest goes to your plan. 

Steps to manage and relieve debt

A divorce may not resolve your debt issues, but at least you’ll know where you stand. You will be empowered to work on those issues independently and seek help when needed.

Keep in mind these basic steps for managing your debt:

1. Have a realistic budget. Work out a budget based on your post-divorce financing. This should account for any debt payments you must make. Try to minimize relying on continued borrowing.

2. Refinance where practical. Restructuring your debts could make your payments more affordable.

3. Communicate with creditors. If you know you can’t make a payment, get in touch with the creditor to see what alternatives you have.

Ask for help from an expert. Debt experts are available to help you with various forms of debt relief.