How Debt Is Split in Divorce: Credit Card, Mortgage, Auto & Medical
The familiar promise that occurs in most marriage ceremonies — ’til debt, um, make that death do us part — can prompt waves of complications when there’s a divorce.
The splitting of shared assets is a priority, but what happens to debt in a divorce? The bills that are routinely handled during marriage can become a contentious issue when things dissolve.
As part of the divorce judgment, the court divides the couple’s debts and assets, while deciding who is responsible for paying specific bills. Equality is the goal, but the division of assets could change that ratio. If a spouse is awarded more property, for example, that decision might be accompanied by more debt obligations for that spouse.
Each state has its own laws for dividing debts and assets. Some states consider the assets and debts each spouse brought into the marriage. Other states consider everything to be owned equally. And, of course, a prenuptial agreement will influence any decision.
Your divorce decree spells out how debt will be divided. Let’s examine debt categories affected by a divorce:
- Credit Card Debt
- Mortgage Debt
- Auto Loan Debt
- Medical Debt
Credit Card Debt
Credit Card Debt in Your Name Only
You will likely not be responsible for your spouse’s credit card debt if it is not held in your name.
Joint Credit Card Debt
The responsibility of joint credit card debt can vary, but most states consider marital debt to be any debt accumulated during the partnership, regardless of whose name appears on the account. It’s likely both parties will be responsible for the credit card debt in a divorce, despite who was making the payment.
Best Option: Sell the House and Split the Money
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 for a clean getaway.
While you wait for the home to sell, you need to work out an agreement with your ex. “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.
Buy Out Your Spouse or Vice Versa
Typically, mortgage debt is assigned to the spouse who makes significantly more than the other spouse. Or it goes to the spouse who is awarded full custody of the children. In those cases, one party will be required to buy out the other’s equity in the home.
“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, a Minority Business Enterprise credit-repair company. “If the mortgage company doesn’t want to remove it, you can refinance the home without the other name being on there.’’
Auto Loan Debt
Both names on an auto loan can be a real problem in a divorce.
“These are hard,’’ Scott said.
He said the best strategy is to approach the lien holder and ask to refinance the vehicle without your spouse. Or insist on an automatic payment coming out of the other party’s account.
“What you really tend to see is the other party not paying and somebody gets stuck,’’ Scott said. “The truth is, if they refuse to pay, everybody’s credit gets messed up.’’
The ugly truth is if one spouse is made responsible for paying a debt following a divorce — including joint debts, such as auto loans — the payments could be ignored. And if the other spouse is part of the loan — as a borrower or co-signer — they are on the hook for any default, late fees or collection costs.
“If you cannot continue to pay your monthly auto loan, and there are no savings to just pay off the debt, then divorce is often a time when people need to trade in expensive cars for something more manageable, given their new budgets,’’ DeMeo said.
In Community Property States (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin), you’ll have to pay your partner’s medical debt.
In the Equal Division Property’ states, the court considers whether the couple was living together (or if there was a legal separation) when the medical debt was acquired, along with the potential impact the debt would have on any children.
It’s also important to know that a divorce agreement does not supersede the terms of a loan agreement.
If Your Ex Files Bankruptcy
If an ex-spouse files for bankruptcy because they can’t keep up with debt payments or other financial obligations, it could affect you.
How? Bankruptcy doesn’t protect you, unless you file as well.
When an individual files for bankruptcy to eliminate a joint debt, the debt isn’t erased in bankruptcy court. It wipes out that person’s liability for the debt. The creditor can then pursue the remaining debtor — the one who didn’t file for bankruptcy — for the full amount.
The bankruptcy could erroneously emerge on your credit report, even though you didn’t file, so be wary.
You also must be meticulous about closing all credit cards and lines of credit. An ex-spouse can transfer balances from their own accounts to joint accounts. Or they could run up the balance, leaving you liable for the purchases.
Another word of caution: Divorce proceedings are fertile environments for identity theft. Be careful to safeguard information such as your Social Security number or else you could one day be digging out of an even deeper financial hole.
What if My Ex Doesn’t Pay Divorce Debt?
Even if one spouse is made responsible for paying a debt following the divorce, and even if it’s a joint debt, such as a car loan, they could ignore those payments. If the other spouse is part of the loan — as a borrower or co-signer — they are on the hook for any default, late fees or collection costs.
If your name is on the loan, 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. It’s always best to include an indemnity clause into your divorce agreement. You could petition the court and demand that terms of the divorce agreement be followed, perhaps causing the spouse to face fines or even jail time.
Pay Off Debt Before Finalizing Your Divorce
The best strategy is to pay off debt your debt before finalizing your divorce. That’s often not possible, however, so the obligations are split. For instance, the woman makes the car payments. The man is responsible for the mortgage payments.
Trouble begins when they either can’t or won’t pay up. Mortgage companies, credit cards and other creditors are not parties to the divorce decree. They don’t care who spent $4,392 on a post-divorce party cruise to Cozumel. They just want their money. If your name is on the account, you are on the hook regardless of what your divorce decree says.
The simple solution: Don’t have any joint accounts.
Try to close them all and refinance the house, car and other loans in one person’s name. Cancel shared credit cards and transfer the debt to cards in each person’s name.
This is where maintaining a civil relationship with your ex comes in handy. Figuratively speaking, it’s much easier to get the house in new financial order when the other inhabitant doesn’t hate your guts.
Other Articles about Marriage, Divorce & Debt
(NA), (ND). Wipe Out Debt, Keep What You Have. Retrieved from http://www.divorcesource.com/ds/encyclopedia/creditor-s-rights-1937.shtml
(NA), (ND). Divorce and Credit. Retrieved from http://www.experian.com/blogs/ask-experian/credit-education/life-events/divorce-and-credit/
(Landers, J.) (2012, Nov. 27). Three Types of Financial Mistakes Divorcing Women Make (And How To Avoid Them). Retrieved from http://www.forbes.com/sites/jefflanders/2012/11/27/three-types-of-financial-mistakes-divorcing-women-make-and-how-to-avoid-them/#dba4e0637129
MacDonald, A., (ND), How Do Family Courts Split Up Debt Upon Divorce. Retrieved from: https://www.legalzoom.com/articles/how-do-family-courts-split-up-debt-upon-divorce
Pritchard, J., (2016, 29 June), What Happens To Debt As Your Divorce Is Finalized. Retrieved from: https://www.thebalance.com/debt-and-divorce-315507
Tayne, L., (2015, 23 June), What Happens To My Debt If I Get Divorced. Retrieved from: http://blog.credit.com/2015/06/what-happens-to-my-debt-if-i-get-a-divorce-119250/
NA, (2011, 19 July), Divorce and Debt: 6 Tips For Avoiding Financial Ruin. Retrieved from: http://www.credit.org/2011/07/19/divorce-and-debt-6-tips-for-avoiding-financial-ruin/
Meyer, C., (2014, 2 March), What Your Divorce Attorney Won’t Tell You About Marital Debt. Retrieved from: http://www.huffingtonpost.com/2014/03/02/marital-debt_n_4861960.html
Harelik, J., (2012, 23 October), Pay Debt When Ex Files Bankruptcy After Divorce? Retrieved from: http://www.bankrate.com/finance/debt/ex-files-bankruptcy-after-divorce.aspx
Buttell, A., (ND), Dividing Credit Card Debt In Divorce. Retrieved from: http://www.creditcards.com/credit-card-news/help/dividing-credit-card-debt-divorce-6000.php
NA, (2013, 17 October), Divorce Survival Guide: 3 Tips To Help You Navigate Debt During Divorce. Retrieved from: https://www.credit.com/personal-finance/divorce-survival-guide/
You will need Adobe Reader to view the PDF Download Adobe Reader