What happens to debt during divorce?

Most Americans are no stranger to debt, but when it comes to divorce, many people are afraid of how debt might follow them into their new life. Will you be saddled with the responsibility to repay debts your spouse took on? 

Just like most aspects of divorce, the answer is complicated. But that doesn’t mean it’s unsolvable. It helps to understand the different types of debt and how they each may be treated differently. 

Marital property vs. separate property

The first concept to understand is the difference between marital property and separate property. Marital property in general includes assets acquired by the couple during the course of their marriage. These assets are usually purchased with joint funds. 

In contrast, separate property is generally an asset acquired by one spouse prior to marriage, or purchased by one spouse with their own funds during the course of their marriage. Separate property may become marital property if both spouses maintain or use the asset with joint funds. This process is called commingling.

An example of separate debt may be a motorcycle purchased by one spouse for personal use before marriage. In contrast, a marital debt might be a home equity loan taken out by the couple against the value of their co-owned home. 

Credit card debt

Credit card debt is often under one spouse’s name and may be considered separate property. However, it is advisable to try to pay off all outstanding credit card debt as part of a divorce settlement if possible.

The reason for this is that although credit card debt may appear to be separate property, creditors are able to pursue the debtor’s ex-spouse for repayment if the couple was married at the time the debt was incurred. If you want to protect your own credit score from being affected by that of your ex, your best bet is to pay off all outstanding credit card debt prior to divorce finalization. This can be arranged between your lawyers as a condition of the divorce if you wish.

Student loan debt

Debts incurred in pursuit of a degree can be labeled as either separate or marital. If the student loan debt was incurred long ago and the resulting job has supported the family for years, that debt will likely be considered marital debt. 

On the other hand, if a degree was obtained long ago but barely used or if a degree was obtained recently, those debts may be considered separate.

Houses, vehicles, and other shared loans

Finally, large debts on things like houses, vehicles, and medical care are almost always considered marital debt if they were obtained during the course of the marriage or if both parties have benefited from the resulting assets.

While the debts themselves may not be split 50/50, the end result of a lawyer-led divorce usually divides finances equitably. For example, if one party is going to keep the co-owned home and take on the mortgage payments, the other party might get to keep the vehicles and be responsible for paying them off. However, depending on how contentious the issues are and the legal fees they incur from their attornies, they may not be able to afford to keep the assets they split.

Sort it out in mediation

The process of divorce is overwhelming in the best of circumstances, and if you and your spouse have a lot of debts between you, it can feel like an insurmountable challenge. 

Here at Haas Mediation, we are experienced in helping couples navigate the intricacies of divorce. In contrast to lawyer-led divorce, in which both parties have their own lawyer advocating for their separate needs, mediation invites a divorcing couple to talk through their wishes together with a professional facilitator.

This allows the couple to determine for themselves what is an equitable distribution of their assets and debts. A court may view the division in a quantitative manner, but if the couple retains autonomy they can come to a different conclusion based on preferences and personal history. Even better, they save money and time through mediation and can often afford to keep the assets they retain.

If you’re interested in making your own choices about your future after divorce, schedule a free 15-minute consultation today to see if mediation is right for you.