You may wonder who is responsible for debt after a divorce when you are going through a separation or ending your marriage. In the divorce process, it can be difficult to figure out what happens to your debt if you intermingle your finances, open joint credit or loan accounts, or buy a home.
A number of factors determine who is responsible, including your state’s laws, your prenuptial agreement, and whose name was on loans and debts.
Debt After divorce, who is liable?
It’s important to understand what happens after a divorce if you have built up a lot of debt during your marriage. You may not be responsible for things you think you are, and you may owe money you thought your spouse would pay back. Ultimately, a lot of the legal responsibility will be based on such factors as the laws of the state in which you live, any prenuptial agreements that were in place, and whose signature is on the loan or credit card agreements.
During your marriage, you may be legally liable for debts if you signed on to a loan as a borrower or cosigned a loan for your spouse. Maybe you took out a loan with the promise that your partner would repay it. It may be the case that the person who promised to repay the loan is liable after the divorce, but if you are the sole borrower, that verbal agreement won’t be valid in court, and it won’t mean anything to the lender.
It is also your responsibility if a spouse fails to make payments on a loan that you cosigned – even if your spouse tells you they will. If your name is on the loan, you are responsible, too.
When sorting through questions about financial responsibility, it’s important to know the difference between marital debt and separate debt. Those who accumulate debt during marriage are considered married, while those who accumulate debt before marriage are classified as separate.
How debt is classified and who is responsible for it
A married couple tends to have twice as much debt as a single individual, according to Experian. There are several factors that can determine who is ultimately responsible for paying off the debt, including the type of debt incurred, who opened the account, and who is listed on the account (joint or individual).
Debt of credit cards
During a divorce, the responsibility for unsecured debts such as credit cards can be a significant point of contention, according to data from the Federal Reserve Bank of New York.
Even after a divorce, individuals remain responsible for any debts attached to their names. If both partners signed a credit card agreement, they both share responsibility for the debt. Although a divorce agreement or decree may state that only one person is responsible, if payments are not made, the credit card company will not be deterred.
Regardless of a court ruling on who is responsible, credit card companies will seek repayment from both spouses.
A creditor may look to the person who signed the credit contract, regardless of how you and your spouse divide debt after divorce.
There are 42 states that follow so-called community property laws regarding debts, while nine states follow common law guidelines.
Most of the time, the person who got into debt during a marriage is the one who has to pay it back. If both people got into debt during a marriage, they both have to pay it back.
Debt due to mortgages
The mortgage debt associated with a home often forms part of a divorce case, and the responsibility for the debt may be handled in several ways.
Rather than refinancing in one spouse’s name, they can agree to keep both spouses on the mortgage, but one spouse will be responsible for the mortgage.
Although a divorce decree may give the house to one person, it does not remove the other person’s name from the mortgage. If both names are on the mortgage, then both people are responsible for the debt.
It is the debt, not the asset, that is the issue. And until the mortgage is paid off or refinanced, both parties are responsible for mortgage payments.
Debt from auto loans
A divorce agreement and the division of assets can determine the responsibility for auto loan debt.
In the event that both spouses own the car, often it is agreed to sell the vehicle and split the proceeds. A car loan might also be assigned in the divorce decree to one or the other spouse.
As a general rule, when it comes to auto loans, the debt follows the underlying property, hence the spouse who receives the car in the divorce is responsible for paying the debt.
Debt from student loans
The repayment of student loan debt would be the responsibility of one person.
Some spouses may cosign for student loans, but that means the debt is theirs and their partners’. Other divorce decrees or agreements may require non-responsible partners to pay.
Debt related to medical care
Whether or not medical debts are considered joint debts depends on the laws of each state and other factors.
Debt relief can look very different depending on the type of debt and why it was built up in the first place. Most likely, the person who got the elective procedure will have to pay back the money. If children were involved, the responsibility could be divided.
Debt from personal loans
It is one person who is responsible for repayment if both spouses’ signatures appear on the agreement. If only one spouse’s name appears on the agreement, it is that person who is responsible for repayment.
Personal loans are generally assigned to the borrower. However, if both parties co-sign, both parties may be responsible for repayment.
Nonetheless, not all personal loans are treated the same. For instance, family loans may be considered gifts to the spouse. It depends on the terms of the divorce settlement or the court’s ruling.
Divorce-related debt incurred during separation
Depending on the state, debt incurred after separation but before the divorce can be subject to different responsibilities.
Depending on the state, the debt may not be treated as a separation phase in local state law. It may be treated as if the couple were not separated.
Divorce: Separating assets and debts
The task of dividing debts and assets during divorce can be daunting. Couples often create joint debt while married, and the mantra “what’s mine is yours” can backfire when assets are divided.
If possible, close down all joint accounts during a divorce so that it is clear who is responsible for the debt.
Getting rid of your name from joint credit cards or being a cosigner on your account can be challenging, though, because some credit institutions require two sources of income. In this case, keep a record of spending activity so that you can demonstrate who is responsible for the debt.
Consider paying off as much of the community debt as you can before starting divorce proceedings. This will allow you to determine who is liable for the debt once you start the divorce proceedings.
Getting rid of debt won’t make the divorce process any more enjoyable, since it is usually full of red tape and unpleasant legal proceedings. Getting your name off joint loans, paying off joint debt, and separating your assets are some of the most important steps you can take if you are heading toward divorce to protect your finances and credit score.