Debt is a reality for a large number of families in the United States. According to Nerd Wallet, the average American family is saddled with $137,063 in debt. With that in mind, we thought it would be useful to republish this article about how debt is treated in divorce.
Did your husband just take out a massive car loan so that he could salve his mid-life crisis with a sleek new Porsche 911 Carrera? Well, once you hand him the divorce papers, you may end up shouldering up to half of that debt!
Many couples assume that working out a divorce settlement is all about figuring out how to divide assets. What they often don’t realize is they will also have to figure out how to manage shared debt.
How Debt Works During a Divorce
Your marriage estate includes all of the assets that you and your spouse accumulated during your marriage along with most types of debt. It doesn’t matter who took out the debt, whether you overspent your credit cards or your spouse bought a second property. That debt is part of your shared estate. (Are you responsible for your spouse’s debts after divorce?)
If you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin, and sometimes Alaska), you are entitled to half of your marriage estate, which includes half of all debt! In equitable distribution states, a judge has more leeway in assigning assets and debt in a way that is considered “equitable,” but you could still end up with your spouse’s debt on your hands.
Why You Should Get Rid of Debt Before Divorce
A divorce is likely to be one of the most destructive financial events of your life. No matter how you look at it, unless you signed an ironclad pre-nup, you are going to lose a very large chunk of your savings and estate. The last thing you want is to walk away from your divorce with loads of debt to your name.
The smartest thing to do is to try to get rid of as much debt as possible before divorce or as part of the divorce process. You can start by insisting that your husband either sell his new Porsche to pay off as much of the car loan as possible, or refinance the loan in his name only. If you are facing a lot of combined credit card debt, it may be worth using some amount of savings or selling assets to pay off the cards so that you can cancel them. (This is especially important if the cards are in both of your names and the credit card companies can go after you if your spouse doesn’t pay.)
Determining what to do about the home is often a trickier question, and we’ve written extensively on how to decide whether or not you should keep the home after a divorce.
Student loans can also be a difficult situation, as these loans usually clearly benefit only one spouse and cannot be paid back by selling a diploma. Depending on the situation and your state of residence, student loan debt may not be considered martial property.
It is almost always a good idea to consult with a divorce attorney before you begin divorce settlement negotiations. Your attorney can help you determine how much debt you have and advise you on how best to negotiate to reduce debt during your divorce settlement.
If you’re not yet ready to make an appointment with a divorce attorney, consider attending your next local Second Saturday Divorce Workshop. The experts at this event can help you answer more specific questions about your divorce situation.