From mortgage loans to joint accounts, divorcing couples often have a lot to consider when dividing debt. If a divorcing couple agrees on how they want to divide their debt, they can include debt division in their settlement agreement. When they can’t agree, the court will either divide debt equally or allocate it in a manner that is fair and equitable to both spouses, depending on the laws of the state.
Separate and Marital Debt
In many states, the court will distinguish between separate debt, typically debt acquired before the marriage, and marital debt. Generally, the court will only divide marital debt between spouses, while separate debt stays with the spouse who acquired the debt. If debt is incurred during the marriage to benefit both spouses, the court will likely consider it marital debt. Mortgage debt for the family home is an example of marital debt. On the other hand, if one spouse had debt before marrying, such as personal credit card debt, it is considered separate, or premarital, debt and the spouse who incurred the debt remains responsible for it after the divorce.
Community Property States
In community property states, each spouse is responsible for half the debt incurred during the marriage. It doesn’t matter which spouse has their name on the loan or account. So long as it is considered community property, each spouse is equally liable for the debt. When making its determination, the court may allocate certain loans or credit card payments to each spouse. However, even when the court makes this allocation, the spouse not assigned to pay the debt is often still liable for it if the spouse ordered to make payments fails to make them. For example, if the parties had a joint credit card account and the party deemed responsible by the court to pay the balance on the card fails to pay, the credit card company will hold the joint account holder responsible.
Many states follow equitable distribution guidelines when it comes to dividing property and debt following a divorce. Instead of automatically dividing assets and debts equally, the court will look at a number of factors to determine a fair and equitable distribution of marital debt. In equitable distribution states, the court might consider the resources and income potential of each spouse when deciding how to fairly divide debt. Additionally, although the court will not divide separate debt, it may consider the amount of separate debt each spouse has when determining a fair distribution of marital debt.
Secured debt is debt secured by collateral, an asset; for example, an auto loan or mortgage. While a divorce decree might order the party who decides to live in the family home to assume the mortgage payments, the lender is not bound by the divorce decree and may hold both parties responsible for the mortgage if the home loan is in both spouses' names. The only way to remove a party from a mortgage is to pay off the mortgage or refinance the loan.