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When you get divorced, you might be wondering who is responsible for the debt. It’s common to have a joint credit card or loan account or to purchase a home together when you’re married, so it can be difficult to figure out what happens to that debt after divorce.
When it comes to who is responsible for debts and loans, there are a variety of factors to consider, including state laws, prenuptial agreements, and whose name is on loan or debt agreements.
In The Event Of A Divorce, Who Is Responsible For The Debt?
Debt can be a big issue during and after divorce. You may not be responsible for the debt you incurred during your marriage, but it is important to understand the laws of your state and any pre-nuptial agreements that were in place. Ultimately, a lot of the legal responsibility will come down to such factors as whose signature is on the loan or credit card agreement.
It’s important to be aware of your financial responsibilities before getting divorced. Any debts that were incurred during the marriage, such as loans or cosigned credit cards, are still your responsibility. This is true even if you agreed verbally with your spouse that they would repay the debt. In the eyes of the law, you are the sole borrower and therefore solely responsible. Lenders will not care about any verbal agreements made between you and your ex-spouse. It’s important to be proactive and understand your financial obligations before going through with a divorce.
As a cosigner on a loan, you are legally responsible for making payments on the loan – even if your spouse tells you they will take care of it. This is true even for late fees charged due to delinquent payments. Simply put, your name being on the loan means you are held accountable.
When sorting through questions about financial responsibility, be sure to understand the difference between marital and separate debt. Marital debt is any debt acquired during the marriage, while separate debt is any debt that one spouse had before the marriage.
Debt that is incurred before marriage or after separation is typically considered to be separate from marital debts and is not usually subject to division during divorce, according to Alison Pahlkotter of the non-profit organization GreenPath Financial Wellness. Marital debts are those that are incurred during the marriage and are considered the responsibility of both spouses.
Debt Types And Responsibilities
Debt can be a major burden for couples, especially when they’re trying to manage their finances together. According to Experian, couples tend to have double the debt of single individuals. This is because the type of debt incurred, who opened the account, and the names listed on the account all play a role in who may ultimately be responsible for repayment.
Credit Card Debt
Debt can be a significant point of contention during a divorce, especially when it comes to unsecured debt like credit card balances. According to data from the Federal Reserve Bank of New York, the average credit card balance in 2021 was $5,221. This means that dividing this debt fairly between divorcing spouses can be difficult and contentious.
It’s important to remember that both partners are still responsible for any debt after divorce. “Both partners signed the card agreement, so both partners are responsible for paying off any debt,” said Michael Sullivan of Take Charge America, a nonprofit credit counseling agency. “Even though a divorce decree or agreement may say that only one person is responsible for paying, credit card companies won’t care about that and will still try to collect from both people.”
Even though a court may rule that only one spouse is responsible for repaying a debt, both spouses will still be pursued by the creditors.
“Your divorce case is not a matter for your credit card company. Even if you and your spouse agree on how to divide debt in a divorce, creditors may still pursue whoever signed the credit contract,” said Kristiana Butler, a family law attorney with Goranson Bain Ausley.
Different states have different laws regarding who is responsible for the debt in the case of a divorce. In 41 states, community property laws apply, while in 9 states common law guidelines are followed. This can have a big impact on who ends up having to pay off debt after divorce.
In the eyes of the law, there are two types of property: marital and non-marital. Marital property is any property acquired during the marriage, while non-marital property is anything acquired before or after the marriage. According to Pahlkotter, “the spouse who incurred the debt is responsible for repayment” in a marital property state.
Mortgage Debt
It is not uncommon for a home to be one of the most significant assets involved in a divorce case. How the mortgage debt associated with the home will be dealt with can vary.
“When both spouses are on the mortgage, they have options regarding what to do with the home. They can sell it, refinance in one spouse’s name, or agree that both spouses will stay on the mortgage but one spouse will be responsible for the payments. These are all viable options that should be discussed between the couple,” said Butler.
When it comes to mortgages, both parties are responsible for the debt even after the divorce decree may give the house ownership rights to one person. This is because the decree does not pay off the mortgage or remove the other person’s name from mortgage documents. Sullivan clarifies that both people are still liable for the mortgage even after divorce.
“It’s important to remember that a mortgage is not just an asset, but also a debt,” said Sullivan. “Both buyers and sellers are responsible for making payments on a home until it’s paid off or refinanced.”
Auto Loan Debt
Auto loan debt can have a big impact on your life after divorce. Depending on the terms of your divorce agreement, you may be responsible for all or part of the debt.
After divorce, it is common for couples to sell their shared car and split the proceeds. According to Pahlkotter, this is often agreed upon by both spouses, or else the divorce decree will assign the car loan to one party or the other. In either case, dividing property after divorce can be a complex process.
In the case of an auto loan, the debt usually follows the car. This means that the spouse who gets the car in the divorce is typically responsible for paying off the loan.
Student Loan Debt
As the cost of college continues to rise, so does the amount of debt that students are taking on to pay for their education. According to a recent report, the average college graduate now owes nearly $40,000 in student loans.
For many graduates, this debt is a heavy burden that can take years to repay. And while a parent or spouse co-signs some loans, the responsibility for repayment ultimately falls on the borrower.
Medical Debt
Different states have different laws regarding joint debt, so it is important to know the law in your state. In some cases, such as with a mortgage or car loan, both parties may be held responsible for the debt after divorce.
“When it comes to repaying debt, there is no one-size-fits-all answer,” said Ajdin Lekperic, co-founder of the debt relief program TheCreditCardMonster. “It all depends on the type of debt and why it was incurred. For example, who is responsible for repayment will likely be different in the case of an elective procedure versus debt accrued to support children.”
Personal Loan Debt
It is important to note that when both spouses sign an agreement, they are both responsible for repayment. However, when only one spouse’s name is on the debt, that individual will be the only one responsible for continuing payments.
Different types of loans have different terms and conditions. For example, with a joint loan, both parties are held liable for the full amount of the debt. However, with an individual loan, the debt is only assigned to one person. According to Butler, this means that the lender can look to either party for full payment of the entire debt.
Personal loans can vary greatly in how they are treated, depending on the situation. For example, a loan from a family member may be seen as a gift to that spouse. “It all comes down to the negotiated settlement – or the ruling of the judge if the divorce is contested,” said Butler.
Divorce-Related Debt Incurred During Separation
In many states, the spouse who incurs debt after separation but before divorce is typically responsible for that debt. However, there can be exceptions to this rule depending on the state in which you reside.
It is important to be aware of the laws regarding debt and obligations during a separation, as these can vary from state to state. Some states may not acknowledge the separation phase when considering debt responsibilities, meaning that the debt will be handled as though the two people were still married. This can remain the case until a divorce decree is finalized.
Divorce Assets And Debts: How To Separate Them
Dividing up debts and assets during a divorce can be a complex and daunting task. Couples who have accrued joint debt during their marriage may find that the “what’s mine is yours” mantra no longer applies when they divorce.
Divorce can be a difficult and stressful time financially. It is important to take steps during this time to protect your finances. One way you can do this is by stopping the use of joint credit cards and closing down any joint accounts. This will help ensure that debt belongs only to one party and avoid any financial complications in the future.
The first step to building good credit is removing your name from any joint credit cards or accounts where you are a cosigner. This can be difficult, as some credit institutions prefer having two income sources attached to an account. However, it is important to take this step to improve your credit score. Keep track of your spending activity and make sure to demonstrate responsibility for the debt to prove that you are a good candidate for future credit opportunities.
“It’s a good idea to refinance your existing loans so that only one person is responsible for them,” said Pahlkotter.
As you begin the divorce process, it is important to try to pay off as much community debt as possible. This can be done through divorce debt consolidation, which can help to determine which party is responsible for the debt. Paying off debt before proceeding with the divorce may make the process smoother and easier.
Final Thoughts
Divorce can be a difficult and stressful process, made even more complicated when there is debt to be split between the divorcing parties. However, there are some steps you can take to safeguard your finances and credit score during this time. Paying off as much joint debt as possible, getting your name taken off of joint loans, and separating your assets are all key measures to take. By taking these precautions, you can help make the process of divorcing a little bit easier on yourself.