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 and whether you’ll need to seek debt relief.

Debt relief options after a divorce include things like bankruptcy, credit counseling, and debt settlement. The right option for you depends on your income, your credit, and how much you owe.

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, or “common law,” 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 generally 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, couples can opt into community property law.

If you live in an equitable distribution state (those states that are not community property states), the division of debts is open to negotiation as part of the divorce agreement. 

From a creditor’s point of view, the primary responsibility belongs to whoever’s name is on the account.

Joint vs. Individual Debt After Divorce

It’s important to note that there are two types of debts that can happen after you divorce:

• Joint accounts: You and your ex-spouse generally share responsibility for joint debts such as mortgages, joint auto loans, and joint credit cards, no matter what the divorce decree says.

• Individual accounts: Debt in only one spouse’s name usually means it stays that person’s responsibility. That’s not always the case, though, such as if you live in certain community property states.

Even if your divorce decree assigns responsibility for marital debt between you and your ex-spouse, creditors aren’t bound by that agreement. If your name is on an account for a joint debt, a creditor may still hold you responsible for it, even if your divorce decree assigns that debt to your ex. 

Likewise, it’s possible for a creditor to come after you for a debt in your ex’s name alone, regardless of what your divorce decree says. But for that to happen, your ex must’ve taken on that debt while you were married, and generally only if you live in a community-property state.

Are Different Types of Debt Treated Differently in Divorce?

The type of debt may 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

In common law states, 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, 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.

If you live in a community property state and your ex opened the card while you were married, you’ll generally be held jointly responsible for the debt, even if your name isn’t on the account.

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 secured 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 likely to still 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 secured 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, and, in some cases, like in community property states—even if your name is not 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 could be assigned to that spouse only.

Student loan debt

Student loans taken out before the marriage typically stay the responsibility of the spouse who borrowed them. Student loan debt taken on during the marriage may be treated as joint debt in a community property state. A court in an equitable distribution state typically looks at whose education the loan paid for and whether the degree benefited the household.

Tips and 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. Just to be sure, you should check your credit reports. Get copies from AnnualCreditReport.com. This should identify all credit accounts that are in your name, including joint accounts.

Joint accounts may 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

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

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.

If your spouse misses a payment that’s their responsibility, consider contacting them first, depending on your relationship, to see if it was a one-time oversight. If your ex won’t cooperate or isn’t making required payments, you may need to talk to an attorney about your options. You may be able to go 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 to get help:

• Debt consolidation. A new loan that you use to pay off multiple smaller debts. Debt consolidation doesn’t reduce the amount you owe, but could make your debt easier to repay if the interest rate is lower or you get more time. Approval typically depends on your credit and income.

• Debt settlement program. 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 financial hardship. You could negotiate your debts on your own or work with a professional debt settlement company. If you enroll in a program, you’ll make a monthly deposit into a dedicated account. It’s possible to complete your program in as little as two to four years. A divorce that reduces your income or increases your expenses may qualify as this kind of hardship. 

Debt settlement may negatively impact your credit.

• 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 three to five 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 for addressing your debts through the courts. Chapter 7 bankruptcy allows you to walk away from your unsecured debts. You may also have to give up some of the things you own. Eligibility is determined by a means test. If your income exceeds certain levels, you may not qualify because a court may conclude you could repay your debts. If so, you’ll be directed to Chapter 13. You keep what you own and make a monthly payment for three to five years. The court will decide how much of your income you can keep for necessities, and the rest goes to your plan.

Protecting Your Credit After Divorce

Along with deciding how to handle existing debt, take a few extra steps to protect your credit during and after a divorce.

• Check your credit report from all three bureaus via AnnualCreditReport.com and look for any accounts you don’t recognize or didn’t know were in your name.

• Consider a credit freeze with Equifax, Experian, and TransUnion. A freeze prevents new creditors from checking your credit. Checking your credit is usually required for opening new accounts, so a freeze is one way to protect yourself from financial fraud.

• Keep monitoring your credit report after the divorce is final, since a joint account may still affect your score if your ex-spouse falls behind.

Steps to Manage and Relieve Debt

A divorce may not settle your debt issues on its own. At least you’ll know where you stand, and you can work on these issues independently and seek help when needed.

Follow these steps to manage 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.

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