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Dealing with Debt During Divorce

Monday, March 3rd, 2014 and is filed under Divorce - Blog Category

If you are approaching a divorce and wondering what your financial state will look like once the process is over, you are likely to be curious about the division of debts during divorce. Just like assets, debts that are incurred during the marriage are considered community property debt. Debts incurred previous to the marriage are considered separate property debt. It’s important to learn the facts about debts during divorce to make sure you and your credit rating are protected.

Generally, there are four basic types of debt:

  • Secured debt: Secured debt is any debt that allows the creditor to repossess the property should the loan go into default. A car loan or mortgage is secured debt. A standard way to handle this debt is that the spouse who keeps the asset after divorce takes responsibility for the debt, but there are a number of reasons that this might not be best in your case.
  • Unsecured debt: Unsecured debt doesn’t allow for repossessing of a certain piece of property, and this type of debt includes credit cards.
  • Tax debt: If you and your spouse file jointly, the IRS can randomly audit your joint returns at any point during a three-year period after filing. Many couples include an agreement about protocol in the event this happens after the divorce is final.
  • Divorce expense debt: Divorce comes with certain costs, and one spouse can petition the court to have his or her attorney’s fees covered by the other spouse.

Settling Shared Marital Debts During Divorce

Dividing assets during divorceThere are four basic ways you can settle shared marital debts during divorce. You can sell joint assets and pay off all the debt during the divorce proceedings. One of the two spouses can agree to pay the majority of the debt, and in return request the majority of the community property. You and your spouse can split the debt and property equally. And if you were the homemaker while your spouse was the breadwinner, he can be ordered to pay the majority of the debt while you get to keep significant assets such as the house and a portion of retirement accounts.

Should you and your spouse decide to split the debt equally, it’s vital that you know that if your spouse fails to pay his share of a debt, the creditor can come after you. That’s because creditors are not bound by divorce settlements. Your only recourse would be to pay the debt, then seek reimbursement from your ex-spouse in the courts. If possible, selling assets to completely settle debts prior to divorce is a more favorable way to handle the settlement. This allows both parties to walk away from the divorce with a clean slate and prevents old debts from coming back on you later.

If you can’t settle all the debt at the time of the divorce, there are other ways to protect yourself, especially if you were a stay-at-home mom fully supported by your husband during the marriage. Make sure you discuss your options with your attorney and your Certified Divorce Financial Analyst so that you are fully protected.

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