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None of us get married thinking it will end in divorce. Similarly, none of us intentionally go deep into debt while we are swiping our credit cards to buy things day-in and day-out. But, unfortunately, some marriages do end in divorce. And, some people do end up accumulating a mountain of debt in marriage. Financial instability and the pressure of increasing debts are often stated as major causes of divorce.
Once a couple decides to split up, they will need to make some critical financial decisions. One of the large elephants in the room, among others, is how to split the debts and who pays for what.
While you and your soon to be ex-spouse might agree on splitting the assets equally, debt distribution is slightly more complicated. Through this post, we will discuss how to handle different kinds of debt in a divorce and how to tackle various tricky scenarios while splitting debt.
Individual Debts And Divorce
If you live in a community property state, any debts incurred while you were married are generally the responsibility of both parties. If you have separate credit cards and are not joint owners, during divorce proceedings you with both be responsible for each other’s credit card debt – as long as it was accumulated during the marriage.
These are the states that fall under the community property laws in the United States:
- New Mexico
However, if you do not live in one of the above-listed states you may live in a common-law state. Imagine this. You and your spouse use the same credit card to shop, but the credit card is under your name. While you were married, both of you contributed towards paying the bill. But now that you have split up, you suddenly find out the onus is on you to pay off the credit card debt, and not your spouse.
When it comes to individual debts that are only linked to you in these states, the lender will hold you accountable for paying it off, irrespective of who benefited from the debt.
You may amicably enter into a court agreement that states your spouse will contribute to clearing your debt. However, your lender might not accept the agreement and use the contract you initially signed with them to hold you solely responsible for the repayment of debt.
Joint Debts And Divorce
Over the years of marriage, a couple might accumulate debts that have been legally signed and consented by both individuals. Such debts are called joint debts. Things like cosigning a loan, taking a mortgage using both your credit scores and holding a joint credit card account can be termed as joint debts.
In the event of a default, the lender will hold both of the parties responsible. While taking your name off of a joint debt is a possible solution, it is easier said than done. It is tricky to disassociate yourself from a joint debt, especially if it was your credit score that helped secure the loan or mortgage in the first place.
The best way to tackle joint debts is to refinance it by opting for separate individual loans or pay the debt off entirely.
Now that we have established what’s an individual debt and a joint debt, let’s discuss how to tackle some common forms of debt.
Mortgages And Divorce
In some cases, one person’s credit score may not be good enough to secure a mortgage. If this is the case and both spouses sign the loan paperwork, the mortgage is considered joint debt.
During a divorce, you can handle the mortgage in three ways.
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- If you wish to continue to own the house, you could try buying out your ex’s equity with the help of your mortgage provider.
- If your ex wants their name removed from the mortgage, you could try refinancing it by taking a loan under your name. Keep in mind that it can be extremely difficult to refinance a joint mortgage by seeking a loan with only one borrower’s individual’s credit score.
- In most circumstances, the best way to tackle the mortgage debt in divorce is to sell the property and use any equity to pay off the mortgage.
Credit Card Debt And Personal Loans In Divorce
As discussed before, if the credit card is under your name, you are the only one accountable for debt repayment (if you do not live in a community property state).
If you live in one of the listed community property states, both spouses will be responsible for all of the debt accumulated during the marriage – regardless of who signed the bill.
In all states, if both spouses are listed on the credit card account, both parties are held responsible for clearing it off. The same ideology applies to personal loans.
While you might sign a court agreement with your ex that states that both of you will contribute towards the joint debt repayment, it is a risky proposition as the lender will flag your credit score if your ex defaults on paying their share of the debt.
If you are dealing with joint credit card debt and your ex wants their name withdrawn from it, then you can opt for a balance transfer credit card under your name. In case of a joint personal loan, both parties can refinance it by taking separate loans.
Auto Loans And Insurance In Divorce
If you bought a car through a joint auto loan with your spouse, you will need to decide who keeps the car. If you are going to be the sole owner of the car, you will need to coordinate with your financer to get your ex’s name removed from the contract. You would also need to update your car insurance by removing their name from it.
In some cases, depending on your ex’s driving history and driving experience, the removal of their name from the vehicle could positively or negatively impact your auto insurance premium. You might want to compare car insurance quotes to get a better deal in terms of a lesser premium.
Hidden Debts In Divorce
Secrets can ruin a marriage, but they can also overcomplicate a divorce. There have been instances of spouses hiding debts from each other, which can spring up as a nasty surprise while finalizing the divorce.
Can you be held accountable for your spouse’s hidden debt?
You could be!
It is always recommended for spouses in the divorce process to share their respective credit reports with each other and with the divorce attorney. This will avoid any last-minute confusion while finalizing the divorce.
What If My Ex Files For Bankruptcy?
A divorce doesn’t just split up a married couple, but it splits their ability to repay debts. Sometimes, the debt that was manageable with two incomes may become too much to handle for a sole earning member. This leads to cases of insolvency.
You may wonder – what if my ex files for bankruptcy? Well, in case of a joint debt, you will be expected to repay the full amount since your ex is unable to pay it. Discuss with your divorce lawyer in advance to deal with situations of bankruptcy.
Can I be Held Accountable For My Ex’s Default?
This is a common question that divorcees ask. At the risk of sounding like a broken record, we reiterate that if you are in a joint debt with your ex and they default in payment, then the lender will hold you accountable for it. It can severely impact your credit score.
To avoid such circumstances in the future, proactively refinance all your joint debts by taking a consolidated debt under your name if you can not repay the debt in full.
Divorces are emotionally and mentally exhausting. But it is also a chance to start fresh. Don’t let ambiguities of debt settlement bog you down. Talk to your ex-partner and your divorce lawyer to chalk out a path to financial clarity.