How Does Division of Debt Work in a Divorce?

When you are either contemplating divorce or in the middle of the divorce process, you need to take your debt into consideration.  As you can probably imagine and as you have likely heard, debt and finances are among the most common reasons for couples divorcing in America in general.  It is a point of real disagreement and stress among couples as to how they are going to pay for debt and bills they incur during the course of their marriage.  Sometimes the stress and disagreement over this rises to such a level that divorce becomes the only option available.  When addressing debt and its relationship to divorce, it is important to understand how state law addresses it.

Most states are a community property state with respect to debt too.  This means that if you incurred debt during the marriage, you will each share in responsibility for the debt.  When the word debt is used in a divorce, debt can be anything from credit card debt to a second home mortgage, known as a home equity line of credit, or even a loan that was made to you from a friend or family member.

There are some exceptions, however.

If your spouse used his credit card to buy an expensive “toy” (for example, golf clubs for a man or a purse for a woman) that has no real economic value or contribution to the marriage, then the judge could decide that incurred debt is the separate debt of the spouse and not shared by the marital community—in other words, it may be determined it is not a debt that is evenly divided.

If you own a home, it is common to sell the home and use the proceeds, if any, to pay off any joint debt, but this is not mandatory.  Be aware of capital gains with respect to the sale of your home.  As the law currently stands, you can exclude the first $250,000 of money you make from your home’s sale.  However, if you make more than that, you will be taxed at the capital gains tax rate.

This percentage amount changes periodically, so it is best to ask a lawyer for the current amount.  At the time of this writing, that amount is either 15% or 20%, though it can change.  Also note that, as of now, if you jointly own the home with your spouse that you’re selling because of your divorce, you are allowed to exclude up to $500,000 of gain if you lived there for two of the last five years.  A vacation house does not count for purposes of capital gains.

A further note about credit card debt since, aside from mortgage debt, that is the most common debt most married couples have: the division of debts between the spouses has no effect on the creditor’s ability to collect the debt.  Even if one spouse is allocated the debt in the divorce, if the debt is one for which the spouse is liable, the creditor can seek payment from the other spouse regardless of the wording of the divorce decree.  The only option the spouse has is to sue the spouse that was supposed to pay and seek repayment.  Be aware of these additional debts as well, though, since they are quite common:

• Home equity line of credit (HELOC loans)
• Promissory notes
• Student loans debts
• Medical debts

It is a good idea to take photographs of your home, car, and other property before you leave so you can document the condition your property was in at the time of separation.  It is also a good idea to notify the credit card companies that you want to be removed from the account and any debt that is placed on the incurred is not your responsibility, assuming you have separated from your spouse.

If you incurred student loan debt, it’s likely that will be a joint debt that your spouse will be responsible for as well, so be aware of this.  In addition, if you own a business with your spouse and you have incurred debt with your spouse for the business, this will also have to be addressed.  Unless you can persuade the judge otherwise, chances are high that this debt will be treated in the same manner as personal debt and you will each be personally responsible for the total incurred debt.