Divorce and Debt: What You Need to Know
During a divorce process, there’s no hard-and-fast rule about who gets what assets. The same goes for which spouse will be responsible for debts after the marriage ends.
When two people get married, their lives — and their finances — become intertwined. But lovebirds don’t go into marriage thinking about divorce, or what happens to their bank accounts if they split up.
Read on to learn more about the intricacies of divorcing with debt.
- How is debt split in divorce?
- Implications of divorcing with debt
- How to avoid debt issues cropping up during a divorce
- Debt and divorce: Frequently asked questions
How is debt split in divorce?
There’s no straight answer on how debt is divided in divorce. It depends on …
- If you live in a community property state or equitable distribution state
- If there is a prenuptial or postnuptial agreement
- If loans are cosigned by both partners
- If the debts are paid out of a joint account
- If the debt was taken on before or during the marriage
- If the debt is secured by marital assets
Between a mortgage, auto loans, credit cards and student loans, couples can share a lot of debt. This can further complicate an emotionally taxing situation.
If you’re not sure what debts are in your name, request a copy of your credit report from Equifax, TransUnion and Experian. You can get a credit report from each bureau once a year through www.AnnualCreditReport.com.
Common law property states vs. community property states
Most states are common law states, or equitable distribution states, where the court determines a fair and equitable way for assets and debt to be divided in a divorce. Couples can also consider divorce mediation, which is handled outside of court.
On the other hand, the law in some states mandates that assets and debts taken on during a marriage should be split equally. Community property is property that you and your spouse or registered domestic partner acquired in your marriage or partnership while you lived in a community property state. There are nine community property states:
- New Mexico
Alaska is an opt-in state, meaning that you can choose to follow the community property laws when you get married. In a divorce, spouses in a community property state will walk away with half of the couple’s assets and debts acquired during the marriage unless they signed a prenup.
Here’s a breakdown of the two types of states:
Debt from divorce by type
The type of debt a couple has will factor into how debt is divided during divorce. For example, the circumstances will be different for a spouse with a personal credit card paid with separate income than they would be for a couple with a joint credit card account.
To get a better idea of how each type of debt is split up after marriage:
Implications of divorcing with debt
- Your credit score could take a hit
- You could still be pursued by creditors
- You could be taxed for assets sold during the divorce
Your credit score could take a hit
If you miss payments on joint debts with your ex-spouse, your credit score could take a hit.
Couples going through a divorce may end up neglecting their finances as they try to get their personal lives in order, but that could cause damage to each spouse’s personal credit.
You could still be pursued by creditors
Lenders and creditors have no legal obligation to follow divorce decrees. Debtors are still bound to auto loan, mortgage, credit card or other agreements that they signed. If you stop making payments, your debts could be sent to collections.
You’ll want to review any communications with creditors with your lawyer.
You could be taxed for assets sold during the divorce
There’s a lot of things to keep in mind during a divorce, but don’t forget to add taxes to the list. According to Sallie Mullins-Thompson, a New York-based certified divorce financial analyst, the tax implications of divorce have been somewhat neglected.
As Mullins-Thompson noted, estimated taxes need to be calculated on a house or taxable asset that’s being divided because the asset’s value will drop. During the asset division process, you’ll also determine who’s going to pay taxes on which assets.
If you sell the asset, you’ll have to factor in that sale during tax season, too.
How to avoid debt issues cropping up during a divorce
- Sign a prenuptial or postnuptial agreement
- Don’t weave all your finances together
- Choose mediation over a divorce in court
Sign a prenuptial or postnuptial agreement
Research from the American Academy of Matrimonial Lawyers suggests prenups are rising in popularity, especially among millennial couples.
“You really have to be careful about all that debt that you bring into a marriage and how you’re going to deal with that, but I think it’s hard for people to talk about that,” Mullins-Thompson said, adding that you could sign a postnuptial agreement immediately after getting married.
Don’t weave all your finances together
There are many ways to express your love without having to put your finances on the line. A 2019 survey from MagnifyMoney — which is owned by LendingTree — found that 31% of millennial couples keep their finances separate, compared with 23% of Gen Xers and 22% of baby boomers.
That could be good news for young couples who refuse to adhere to this old-fashioned standard. It allows them to earn and spend at their own discretion, and it can also be helpful in a divorce.
Some couples might choose to have a joint bank account as well as their own separate bank accounts, so they can spend at their own discretion while also sharing communal bills out of the joint account.
Choose mediation over a divorce in court
This option may not be practical for everyone, because divorce isn’t always amicable. However, working out your finances in mediation could be a better option than having the courts decide how to split your money.
When you go through mediation, also known as collaborative divorce, you may work with lawyers, mediators, accountants and even therapists. Everything is handled outside of the courtroom, creating a more synergistic process.
“As long as all parties are upholding their end of the bargain, then it works,” said Mullins-Thompson.
Debt and divorce: Frequently asked questions
Who is responsible for debt after a divorce?
In short, both parties will have to reconcile marital debt that was held jointly. The only exception is if your accounts were completely separate.
If you live in a community property state, each party is responsible for half of the debt accrued over the course of a marriage.
Are you responsible for a spouse’s credit card debt?
Yes, if you live in a community property state. Sometimes, if you live in an equitable distribution state and have a joint credit card account. No, if you live in an equitable distribution state and the credit card is in your own name.
Can a spouse’s bank account be garnished for the other’s debts?
Yes, but a lender must obtain a court judgment first. Lenders and credit card companies aren’t bound by divorce decrees, but by the original lending agreement that you signed. During a divorce, you’ll need to get accounts transferred to the responsible spouse’s name before the divorce is finalized or immediately after.
Which states are community property states?
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Alaska allows its residents to opt in to community property laws upon marriage.
How does bankruptcy work during a divorce?
That depends on the chapter of bankruptcy you want to declare and when you want to declare it. As a couple, you’ll need to decide if it’s best to file together through a joint petition, or if you should separate your assets and debts to file separately.
It costs less to file bankruptcy together, and discharging marital debts could make the divorce process easier. But you should also consider the thought of being tied up in your marriage for longer from a legal perspective.
You could always file individually before the divorce is finalized, if one party needs bankruptcy protections right away. Ultimately, you’ll need to meet with a bankruptcy lawyer to determine the right course of action.