How Debt Is Divided in Divorce: Credit Cards, Mortgages, Auto Loans & Medical Bills

When you’re going through a divorce, it can be painful and frustrating to split up your assets. For some couples, the most challenging part is agreeing on who will pay your shared debt.

There’s no one-size-fits-all solution, since every couple is in a unique financial situation, and most states have their own laws that apply.

If you live in one of the 41 states that has “equitable division,” sometimes called “common law” division, the spouse with the highest income may have to take over more of the shared debt. In the “community property” states, debt you took on during the marriage can be divided 50-50.

However, even if you have a divorce decree stating you’re not responsible for a certain debt, you can still have debt problems with the account. In most cases, the creditor will still keep your name on the account and can even come after you for the money.

How State Law Affects Debt Division in Divorce

As you work out the details of your divorce, you and your ex-spouse can come to your own agreement on how to split your debt. However, if you want a legally-binding agreement, you’ll have to go to court and have your debt divided based on state laws.

When you do this, the court will first decide what counts as “separate property,” meaning it belongs to one spouse, and what is “marital property,” meaning it needs to be divided. Typically, debt acquired before the marriage is considered separate property.

How will your marital property be divided? It depends largely on the laws in your state:

• Equitable distribution: Instead of dividing it equally, the debt is divided “fairly” based on details such as each of your incomes and what you contributed to the household.
• Community property: The debt may be divided 50/50, or in a way that gives each spouse an equal share of responsibility.
• Opt-in: The state lets you choose to opt-in to the community property system.

Here’s a list to help you figure out which system is used in your state:

Property Division Laws by State

Who Is Responsible for Debt After Separation but Before Divorce Is Final?

Many people find themselves incurring debt in the period between their separation and their divorce. This often includes money spent on things like moving, living expenses and legal fees.

When it comes to this debt, some states won’t take your separation into account. In other words, it will be handled the same way it would be if you were still together. In other states, debt incurred once the couple separates is considered differently.

If you don’t live in a community property state, the debt you incur will likely be considered yours alone.

Joint accounts, however, can be a problem. Creditors want to be paid, and the only thing they consider is the name on the account. If your name is on a credit card or loan, the creditor considers you responsible for paying it. In addition to late fees, missed payments on the accounts can do damage to your credit scores.

Credit Card Debt

Credit card debt can be particularly challenging, since it’s not always clear who spent the money. Additionally, many of the charges on one spouse’s card may have been made for shared expenses. Here’s what you should know about splitting this type of debt.

Credit Card Debt in Your Name Only

In most states, you are not responsible for your spouse’s credit card debt if it’s in their name only. However, in community property states, if the debt originated during the marriage, you’re likely to be responsible for 50%.

How can you protect yourself from being liable for your spouse’s credit cards? Here are a few steps we recommend:

• Pull your free credit reports from AnnualCreditReport.com to see which accounts have your name on them.
• If you’re an authorized user on your spouse’s account, contact the creditor and have your name removed.
• If you have shared accounts, consider paying them off and closing them to prevent new charges.

Joint Credit Card Debt

In most states, both parties have some responsibility for the debt on joint credit cards. This is true even if only one spouse used the card.

In community property states, each party will likely be responsible for 50%. In other states, a judge may decide that one spouse has the ability to pay more than the other.

Unfortunately, you can’t remove yourself from a joint account, but here are a few options to consider:

• Close the account if there’s no balance.
• Make an agreement to move the debt to your individual accounts and then close the card.

If you don’t close the account, your ex-spouse might use the cards to pay off their other debt or to cover expenses. Whatever they do with the account will also be recorded on your credit reports and impact your scores.

Authorized User Credit Card Accounts

Are you an authorized user on your ex-spouse’s credit card? If so, you’re not legally liable for the debt. But the information about the account is reported on your credit reports.

To have the account information removed, and to prevent your ex-spouse from harming your credit, you can simply contact the creditor and ask them to remove you as an authorized user.

If you’re the primary cardholder, you can also contact the creditor to have the authorized user’s name removed.

How Divorce Debt Can Affect Your Credit

Getting divorced can take a big toll on your credit if you’re not careful. Even if you have a divorce decree that states you’re not liable for the debt, the lender or credit card company can still hold you responsible, since you already agreed to take legal responsibility when you opened the account.

If your spouse is assigned responsibility on an account that has your name, you should do everything you can to get your name removed. This might include closing the account or refinancing to a new loan. If you don’t, here’s what can happen:

• Missed payments will appear on your credit reports for 7 years and cause your scores to drop.
• The creditor can come after you for late fees and overdue payments.
• Debt collectors may contact you to collect the debt.

Problems like these can make it harder for you to get approved for your own loans and credit cards, and to get approved to rent apartments.

To further prevent your ex-spouse from doing harm, consider setting up a credit freeze on your reports and regularly pulling your reports from AnnualCreditReport.com to monitor them. You should also ask your ex-spouse to provide you with documentation providing that shared accounts have been closed.

Mortgage Debt

Mortgage debt can be more complicated than credit card debt because it involves both a loan and property rights. In many cases, responsibility will depend on whose name is on the mortgage, whose name is on the title, and how state law treats marital property.

If a House Isn’t in Both Names

If the home you shared is in one person’s name, the court will usually consider a few details when determining how the home’s value will be split. This includes:

• The couple’s financial situation
• Why the loan is in one person’s name
• Whether one spouse contributed their separate assets to the purchase and/or payments

In a community property state, the house may be considered shared property, even if one spouse made a larger contribution to the cost. It’s best to hire a lawyer to help with this if you’re in that situation.

As with other types of debt, it’s important to note that the court’s ruling will not change the mortgage agreement. If the loan is only in your name, the lender will only come after you to collect the payments.

Mortgage Loan vs. Title

When it comes to homeownership, it’s important to know that the title and the mortgage are two separate things. If your name is on the mortgage, you’re responsible for paying the loan. If your name is on the title, you own the property.

If you’re removed from the mortgage, you’ll also need to make sure your name is no longer on the title. You can do this by making a title transfer through your county deed office, but it must be signed by both parties.

If your name is removed from the title, you no longer have any claim to the home and you won’t get money when the house is sold. But removing your name from the title does not remove your name from the mortgage.

If your ex-spouse misses loan payments, and your name is on the mortgage, your credit will be damaged and you can be held liable for the payments.

Best Option: Sell the House and Split the Money

If both parties are on the mortgage, the best way to separate your finances is to sell the house and split the money.

However, while you wait for the home to sell, there’s a good chance that several mortgage payments will come due. During this period, it’s essential to have a clear plan for who will cover the 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.

Many couples want to keep the house they shared for the sake of the children, or for their own comfort. But the pros to selling might still outweigh the cons. Here’s what you’ll need to consider when it comes to selling a home you shared:

Pros

• Make a clean financial break from each other
• Payments may be too high for a single-income household to sustain
• Proceeds can potentially be used for a buy out
• Proceeds can be used to help you make a new start
• Avoid financial and credit damage from missed payments

Cons

• Inconvenience of selling the home
• Time and money spent on moving to another residence
• Potential destabilizing impact on the household
• Potential financial loss if there’s limited equity
• You may have to pay capital gains tax on the sale

Buy Out Your Spouse or Vice Versa

Will one of you be keeping the home after your divorce? If so, one spouse will likely have to buy out the other and take over the mortgage.

For most people, buying out an ex-spouse isn’t doable without a few extra steps. To afford a buy out, you may need to either sell the house or refinance.

Refinancing involves taking on a new loan to pay off the mortgage. Like with other loans, you’ll need to qualify for a refinance based on your own credit, income and more.

But for the spouse who is keeping the home, the buyout is not the final step. You’ll also want to make sure your ex-spouse’s name is removed from the title, to ensure they no longer have a claim on the property.

Auto Loan Debt

Auto loans that are in both names can be a real problem in a divorce.

In most cases, the couple agrees that one person will keep the car and make the payments. However, if that person doesn’t pay, the lender can come after both of you for late fees or collection costs. You can also both be held liable if the car is in an accident.

Here are some ways to deal with a joint car loan after divorce:

• Pay off the balance: Use savings or an auto refinance loan to pay off and close the original loan account. The person who keeps the car will need to take out any refinance loans in their own name, and they will have to qualify based on their own credit and income.
• Set up auto-pay: Make sure that the person who keeps the car sets up automatic payments to stay up-to-date on the loan. Automatic payments can even be part of the divorce ruling.
• Sell the car: Sell the car and split the proceeds. If you’re unable to decide what’s fair, the court may make the judgment.

According to DeMeo, “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 issues. Make 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. It must be signed by both parties.

Medical Debt

Medical debt can also complicate a divorce. 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. If it was incurred during the marriage, and you live in a community property state, it will likely be split 50-50.

However, debt from an emergency or other necessary medical procedure will likely be considered different from debt for an elective surgery.

Regardless of the reason for the bills, the judge will make a decision based on the individual divorce case. This includes deciding how medical debt should be split for a child’s illness, birth or emergency.

Even if the judge determines the medical debt is not yours, the debt can still impact your credit. If you paid with a joint credit card or cosigned for the treatment, creditors can attempt to collect the money from you, and the accounts can appear on your credit reports.

If Your Ex Files Bankruptcy

If an ex-spouse files for bankruptcy after a divorce, it could have a major impact on you.

Divorce doesn’t overrule your agreements with your creditors, so any joint accounts are still considered both of your responsibility. In other words, when one of you files for bankruptcy, it doesn’t wipe out the debt, it just eliminates one person’s liability for it. The creditor can still pursue the other debtor who didn’t file bankruptcy.

A few other things to know about bankruptcy and divorce:

• Filing for bankruptcy triggers an “automatic stay,” meaning divorce proceedings will be paused.
• Chapter 7 proceedings usually pause divorce proceedings for a few months, but Chapter 13 repayments can pause them for years.
• If a spouse has too much income to qualify for Chapter 7, they can still potentially qualify for Chapter 13.

Child Support and Alimony in Bankruptcy

Child support payments and alimony are both considered “not dischargeable.” That means, even if you file for bankruptcy, you still have to make your court-ordered payments. If you fall behind, interest can be added to your balance.

Child support and alimony payments will automatically be withdrawn from your paycheck. If you’re unemployed, you can pay them through your state’s payment system.

What Happens If My Ex Doesn’t Pay Court-Ordered Debt?

If an ex doesn’t pay their debt as required by the court, there are steps you need to take to protect yourself and your credit. Here’s what you can do:

• Get a court order to identify your ex’s assets and potentially put a wage garnishment or bank levy in place.
• If your name is on the debt account, you may want to pay the bill or refinance the debt into your own name in order to avoid damage to your credit.
• Keep records of your payments so you can ask the court to enforce the decree and reimburse you.

Pay Off Debt before Finalizing Your Divorce

For many people, the best strategy is to pay off and close your shared debt accounts before finalizing your divorce. This will prevent you from having unnecessary financial ties after the divorce is finalized.

If that’s not possible, you can either refinance accounts into one name, or agree with your spouse on how you’ll split obligations.

The two of you will ideally work together to determine what’s fair and affordable for each of you. For instance, if you’ve paid more toward the mortgage, you might take over the mortgage payment and keep the house, while your ex takes over the car payment.

Just keep in mind that creditors will not honor your personal agreements, so you may suffer consequences if your spouse fails to keep up their end of the bargain. This is where maintaining a civil relationship with your ex pays off. It’s much easier to sort out finances if you’re not in fighting mode.

Also, be aware that a jaded ex-spouse may be tempted to commit identity theft or credit card fraud. Be careful to safeguard sensitive information, such as your financial account numbers.

Speak with a Financial Professional or Family Lawyer

You don’t have to navigate the complexities of divorce on your own. If you have a complicated debt situation or you need help adapting to all of the financial changes you’re going through, you may want to speak to a professional. Here are some of the professionals who can help:

• Family lawyers: A family law attorney can assist with issues like child custody and dividing your estate.
• Financial planners: A financial planner or Certified Divorce Financial Analyst (CDFA) can help you make the best moves to reduce taxes on your assets, update your retirement plans, and adjust to your new financial reality so you can achieve your long-term financial goals.
• Credit counselors: An NFCC-certified credit counselor can review your finances and help you update your budget to prepare for a divorce. They can also review your credit and suggest ways to manage debt and collections, and avoid credit damage.

These professionals are familiar with the ins and outs of debt and divorce. Because of that, they can review your situation objectively, and help ensure that emotions don’t cloud your judgement or lead to poor financial decisions. Ultimately, they can help smooth out the path as you move into this next phase of your life.