How do I handle shared debts during a divorce?

Handling shared debts during a divorce can be one of the more complicated aspects of the financial settlement. Debt division must be done carefully to ensure both parties are treated fairly and that both spouses understand their financial responsibilities moving forward. Here’s a guide to managing shared debts during a divorce:

1. Identify and Categorize Debts

• Marital vs. Separate Debts: The first step is to distinguish between marital debts (debts incurred during the marriage) and separate debts (debts incurred before the marriage or by one spouse individually).
  • Marital Debts: These debts, such as credit card balances, mortgages, or loans taken out for family-related expenses, are typically divided between spouses in a divorce.
  • Separate Debts: Debts one spouse incurred before the marriage or those solely for one spouse’s personal use may remain the responsibility of that spouse, depending on the laws of the state.

2. List All Shared Debts

• Compile a List: Work with your spouse (if possible) to compile a list of all shared debts, including credit card balances, personal loans, mortgages, and any other joint financial obligations. It’s important to document the total amounts owed and who is responsible for paying what portion.
• Consider Future Debt: Consider any ongoing debts, such as a mortgage, car loan, or student loans, and determine how those will be handled post-divorce. This may include refinancing joint loans into individual names or selling assets to pay off the debt.

3. Determine Debt Responsibility

• Negotiating Debt Division: The next step is to determine how the debts will be divided. Generally, the division of debts is handled as part of the property division process.
  • Equitable Division: In most states, marital debts are divided equitably, meaning fairly but not necessarily equally. The division will depend on factors like income, ability to pay, and other relevant circumstances.
  • Equal Division: In community property states (e.g., California, Texas), marital debts are typically divided equally.
• Debt Assignment: When negotiating the division of debt, each spouse should understand which debts they will be responsible for paying post-divorce. The divorce decree or settlement agreement should clearly outline these responsibilities to avoid future disputes.

4. Refinancing and Removing Names from Accounts

• Refinancing Joint Debts: If you and your spouse have joint credit cards, loans, or a mortgage, consider refinancing these debts in the name of the spouse who will take responsibility for them. This removes the other spouse from the debt obligations.
  • Mortgage Refinancing: If one spouse keeps the family home, they may need to refinance the mortgage to remove the other spouse’s name from the loan. This ensures that both spouses are not jointly liable for the same debt.
  • Credit Card Accounts: For joint credit cards, it may be necessary to close the accounts and open individual cards. The spouse who is responsible for the debt should assume full liability for any remaining balance.

5. Addressing Debt in the Divorce Decree

• Court Order: Ensure that the division of debts is included in the final divorce decree. A court order will make the agreement legally binding, and the court can enforce the payment obligations.
  • Protecting Your Credit: If your spouse fails to pay their share of the debt, you might still be liable for it if your name remains on the account or loan. Therefore, make sure your divorce settlement clearly outlines each party’s responsibilities and seeks to remove your name from any joint debts that are assigned to your spouse.

6. Dealing with Debts After Divorce

• Debt Not Paid as Agreed: If your spouse fails to pay their share of the debts as agreed, and you’re still jointly responsible for them, you can take legal action to enforce the divorce agreement. This could include filing for contempt of court if your spouse is not complying with the terms of the divorce decree.
• Impact on Credit: If debts are not paid according to the agreement, both spouses may suffer a negative impact on their credit scores. If you're still listed as a co-borrower, you could be held liable for any unpaid amounts, which may hurt your credit. You may need to monitor your credit report and take corrective actions if necessary.

7. Seek Professional Help

• Financial Advisor: If the debts are complex or there are significant assets involved, it’s advisable to consult a financial advisor or a debt counselor. These professionals can help you assess the total debt load, propose a fair division plan, and assist in the process of refinancing or transferring debt.
• Attorney Assistance: Having a family law attorney can help ensure that your rights are protected during the division of debts. They can also help you ensure that the settlement agreement clearly outlines each spouse’s responsibility and that the terms are enforceable in court.

8. Example

If you and your spouse have joint credit card debt of $10,000 and a mortgage with $100,000 left to pay, your divorce decree might state that:

• You are responsible for paying off $5,000 of the credit card debt and your spouse is responsible for the remaining $5,000.
• One spouse might keep the family home and be responsible for the mortgage payments, but the other spouse could be required to be removed from the mortgage through refinancing or selling the house.
• The agreement should also specify that the spouse who assumes responsibility for certain debts will indemnify the other spouse in case they fail to pay.

Conclusion

Handling shared debts during a divorce requires careful planning, clear documentation, and negotiation to ensure that the debt is divided fairly and that both parties understand their responsibilities. It’s important to categorize debts properly, negotiate a fair division, and take steps to ensure that both spouses are removed from joint liabilities where possible (such as refinancing loans or closing joint credit accounts). Always make sure that the debt division is clearly outlined in your divorce decree to avoid future legal and financial problems. Consulting a financial advisor or a family law attorney can help ensure that the division is done in your best interest.