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As if going through a divorce isn’t stressful enough, the division of assets and debt can turn an unpleasant process into a contentious one. While the division of assets often takes center stage, the allocation of debt can have equally significant long-term financial implications for both parties.
This article aims to provide an understanding of how debt is typically divided in divorce, the factors that influence this division, and what individuals should consider when navigating this process.
Understanding marital debt vs. separate debt
It’s crucial to know the difference between these two types of debt:
Marital debt:
- Debt acquired during the marriage.
- Generally considered the responsibility of both spouses.
- Examples: Mortgages, joint credit card debts, car loans for family vehicles.
Separate debt:
- Debt acquired before the marriage or after separation.
- Usually remains the responsibility of the individual who incurred it.
- Examples: Student loans taken before marriage, credit card debt from post-separation spending.
Legal principles governing debt division
The division of debt in divorce is governed by state laws, which generally fall into two categories:
Community property states:
- All marital debt is typically split 50/50, regardless of who incurred it.
- Nine states follow this principle: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
Equitable distribution states:
- The remaining 41 states follow this principle.
- Debt is divided “fairly,” which doesn’t necessarily mean equally.
- Factors such as each spouse’s financial situation and behavior during the marriage are considered.
Factors influencing debt division
Courts and mediators consider various factors when dividing debt:
- Income and earning capacity: The ability of each spouse to repay debts post-divorce.
- Asset division: How assets are divided can influence debt allocation.
- Child custody: The parent with primary custody may retain the family home and associated mortgage.
- Purpose of the debt: Debts incurred for family expenses vs. personal expenses.
- Behavior during marriage: Wasteful spending or financial infidelity may be considered.
- Length of the marriage: Longer marriages may lead to more intertwined finances.
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Common types of debt and their division
Different types of debt may be handled differently in divorce:
Mortgage Debt:
- Often the largest marital debt.
- Options include selling the home and splitting proceeds, or one spouse buying out the other’s equity.
- Refinancing to remove one spouse from the mortgage is common.
Credit card debt:
- Joint accounts are typically divided based on state laws.
- Individual accounts may remain with the cardholder, but exceptions exist.
Auto loans:
- Often assigned to the spouse who keeps the vehicle.
- Refinancing may be necessary to remove the other spouse from the loan.
Student loans:
- Usually considered separate debt, but exceptions exist if the loans benefited the marriage.
Business debt:
- Can be complex, especially if both spouses were involved in the business.
- May require professional valuation and complex negotiation.
The role of prenuptial and postnuptial agreements
These agreements can significantly impact debt division in a few key ways:
Prenuptial agreements:
- Made before marriage.
- Can specify how debt will be handled in case of divorce.
Postnuptial agreements:
- Made during marriage.
- Can address debt division and other financial matters.
Negotiation and mediation in debt division
Many couples opt for negotiation or mediation to divide debt:
Benefits:
- More control over the outcome.
- Potentially less costly and time-consuming than litigation.
Considerations:
- Both parties should have a clear understanding of all debts.
- Professional mediators can help navigate complex financial situations.
Protecting yourself during debt division
Steps to safeguard your financial interests include:
- Full financial disclosure: Ensure all debts are disclosed and documented.
- Credit monitoring: Watch for new debts or accounts opened in your name.
- Closing joint accounts: When possible, close or separate joint accounts.
- Get everything in writing: Ensure the divorce agreement clearly outlines debt responsibilities.
The bottom line
The division of debt in divorce is a complex process that can have long-lasting financial implications for both parties. Understanding the principles that govern this division, the factors that influence it, and the steps you can take to protect your interests is crucial for navigating this challenging aspect of divorce.
While the legal and financial aspects of debt division are important, it’s also essential to consider the emotional and practical realities of disentangling shared financial obligations. Open communication, thorough documentation, and professional guidance can help ensure a fair and manageable outcome.
There’s always JG Wentworth…
Regardless of whether or not you’re going through a divorce, if you have $10,000 or more in unsecured debt, there’s a good chance you’ll qualify for the JG Wentworth Debt Relief Program.* Some of our program perks include:
- One monthly program payment
- We negotiate on your behalf
- Average debt resolution in as little as 48-60 months
- 24/7 support
- We only get paid when we settle your debt
If you think you qualify for our program, give us a call today so we can go over the best options for your specific financial needs. Why go it alone when you can have a dedicated team on your side?
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The information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that You consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.
* Program length varies depending on individual situation. Programs are between 24 and 60 months in length. Clients who are able to stay with the program and get all their debt settled realize approximate savings of 51% before our 25% program fee. This is a Debt resolution program provided by JGW Debt Settlement, LLC (“JGW” of “Us”). JGW offers this program in the following states: AL, AK, AZ, AR, CA, CO, FL, ID, IN, IA, KY, LA, MD, MA, MI, MS, MO, MT, NE, NM, NV, NY, NC, OK, PA, SD, TN, TX, UT, VA, DC, and WI. If a consumer residing in CT, GA, HI, IL, KS, ME, NH, NJ, OH, RI, SC and VT contacts Us we may connect them with a law firm that provides debt resolution services in their state. JGW is licensed/registered to provide debt resolution services in states where licensing/registration is required.
Debt resolution program results will vary by individual situation. As such, debt resolution services are not appropriate for everyone. Not all debts are eligible for enrollment. Not all individuals who enroll complete our program for various reasons, including their ability to save sufficient funds. Savings resulting from successful negotiations may result in tax consequences, please consult with a tax professional regarding these consequences. The use of the debt settlement services and the failure to make payments to creditors: (1) Will likely adversely affect your creditworthiness (credit rating/credit score) and make it harder to obtain credit; (2) May result in your being subject to collections or being sued by creditors or debt collectors; and (3) May increase the amount of money you owe due to the accrual of fees and interest by creditors or debt collectors. Failure to pay your monthly bills in a timely manner will result in increased balances and will harm your credit rating. Not all creditors will agree to reduce principal balance, and they may pursue collection, including lawsuits. JGW’s fees are calculated based on a percentage of the debt enrolled in the program. Read and understand the program agreement prior to enrollment.
JG Wentworth does not pay or assume any debts or provide legal, financial, tax advice, or credit repair services. You should consult with independent professionals for such advice or services. Please consult with a bankruptcy attorney for information on bankruptcy.