You spent the first part of your marriage finding all the ways you could meld your lives together. The latter part has been spent just trying to keep it together. Now that you’ve decided to step into the realm of divorce, you’re wondering how to separate everything again. If you have mortgages on homes, loans on cars, and credit cards for everything in between, how do you go about dealing with divvying up your debt in divorce?
How To Split Debt During Divorce
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Know What You Owe
When it comes to debt in a divorce, state laws can vary. However, courts usually distinguish between individual debts that you brought into the marriage and the debts acquired during the marriage. Pre-marital debts typically remain the sole responsibility of the one who collected them. However, this can get a little tricky, if those debts were rolled into a joint account. This is why it’s important for both parties to be fully aware of your overall financial position – including both your assets and all your debts.
Debts could include:
- Credit card debts
- Student loans
- Vehicle loans
- Home mortgages
- Personal loans
In community property states – states, where all assets and debts accrued during the marriage, are divided equally between the two parties – the responsibility for these marital debts is not necessarily assigned based on which spouse incurred the debt. It all depends on how the settlement looks when the dust settles.
The fact is, no matter how the court awards alimony or divides up the debt, banks and lenders expect the debts to be paid as agreed.
The original agreements and contracts with the lenders supersede divorce decrees, and creditors can still come after you for debts that you did not create.
For example, if your ex is assigned the responsibility of making payments on a credit card in your name and she fails to do so, it will negatively impact your credit.
Yes, you can take legal action against her, but by the time you get to court and a settlement is reached, your credit may have already tanked.
All’s Not Fair In Love
Realize that equitable division of existing debts is not always 50/50 equal. In the instance that one spouse reports significantly higher income than the other, the judge may determine that “fair” means the more established spouse receives more responsibility than the other spouse for the debts acquired during the marriage – regardless of whose fault the expenditures were. In addition, the value of assets awarded and the distribution of the responsibilities for marital debts are also often related. Navigating this territory can get complicated. Talking with a family law attorney can help you understand your best options and discuss how to potentially negotiate a successful settlement of your debt in divorce.
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Preempt Dealing With Debt In Divorce
The best way to deal with debt in divorce is to pay off as much of the debt as possible prior to filing for divorce. Work together to decide how debts should be assigned before entering divorce proceedings. It’s not easy and may require some assistance from a family attorney, but it can be vastly worth the effort.
Once you know what you’re likely going to be financially responsible for dealing with moving forward, you can start working on solutions like transferring balances to credit cards under the correct person’s name or consolidating the balances of cards with another loan.
You may also consider refinancing loans for assets, like the house or car, into the person’s name who’s keeping the asset. If you and your spouse are unable to come to satisfactory conclusions and solutions, talk to your attorney about how to appropriately sell assets to pay off loans to prevent defaults.
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FAQs On Dividing Debt In Divorce
What Happens When Your Ex Files for Bankruptcy?
When it comes to dividing up debt in a divorce, some eventualities like bankruptcy can happen. Your ex-spouse may choose bankruptcy as a way to avoid repaying debt. What will happen in such a case? Well, your ex-spouse’s bankruptcy won’t protect you if you don’t file as well. Generally, filing for bankruptcy to get rid of joint debt doesn’t mean such debt is automatically erased in a bankruptcy court.
Bankruptcy usually eliminates a person’s liability to the debt in question. Creditors can still pursue remaining debt from you if you don’t file for bankruptcy as well. What’s more, your credit history can be tainted when your ex files for bankruptcy and you don’t.
It’s advisable to take debt matters proactively when your ex files for bankruptcy. For instance, ensure you close all lines of credit. Most importantly, you should really consider filing for bankruptcy when your ex files otherwise, you stand liable.
What If My Ex-Spouse Refuses To Pay Divorce Debt?
Assuming your ex has sole responsibility for some debt and refuses to pay, what will happen? If you are a co-signer of debt that your spouse refuses to pay, you could be liable if they default. Besides being forced to repay the debt, you will be liable for collection fees, among other applicable charges like late fees.
In most cases, persons whose name is on a loan are solely responsible. Lenders rarely care if there is a divorce or not. They focus on being paid by any means. The importance of including critical debt indemnity clauses in a divorce agreement can’t be overlooked. In case an ex refuses to repay the debt you co-signed, they will still be liable to any charges and/or criminal charges.
How Do I Protect Myself From Future Debt?
Debt division matters should concern you even after a divorce is finalized. For instance, you should close all joint accounts opened during a marriage to ensure they aren’t used to acquiring more debt. Your ex can transfer money from their account to such accounts or run up balances resulting in liability for purchases made using such accounts.
Remember, authorized use of an existing account isn’t a crime. What’s more, creditors go after primary account holders in case such accounts accumulate debt.
Non-payment results in many negative consequences, from bad credit history to debt collection.
In case you leave a joint account open, and your ex takes debt and refuses to pay for it, you can take up such debt if you are a primary account holder and then pursue your ex in court. This option can be costly. However, it’s better when you want to maintain your credit score.
How Do You Separate Assets & Debt In The Presence Of A Prenup?
Identifying separate assets is a critical factor in the division of debt. When you know what you own, you are in a better position to safeguard your finances. Assuming you had a prenuptial agreement that states what you will be entitled to in case of a divorce, such an agreement is used during a divorce.
However, prenups are effective for separating assets only. They may not protect a spouse from shared debt accumulated during a marriage. However, it is possible to invest your money in avenues that protect such monies from your ex’s debt. Trusts, retirement plans, annuities, and corporations are good examples of areas where money can be protected from your ex’s debt.
However, you need to talk to a seasoned divorce attorney for concrete advice on protecting your assets from debt accumulated during a divorce.
How Do You Protect Money During Divorce?
Assuming you have joint debt or your ex has debt, how do you protect the little money you have from being taken as part of repaying debt?
When everything is going well in marriage, spouses aren’t that keen on debt and assets. In fact, they view their assets and liabilities jointly. However, everything changes when a divorce is looming. The thought of protecting what you have is inevitable, especially if there is debt to be settled.
To secure your money during a divorce process, stop using debt such as joint credit cards to make it easier to establish who took the debt. You should also close joint accounts and remove yourself from any account where you are a co-signer. This process will obviously be challenging.
However, if you find a seasoned divorce attorney, they will be able to guide you accordingly.
It may be advisable to reduce the levels of community debt before commencing divorce proceedings. Debt consolidation can also help you move forward as it makes it easy to establish who is responsible for what debt.
Is A Divorce Settlement Agreement The Best Option?
Most divorces will end up in trial, especially when they are major differences in factors like debt that couples can’t agree on amicably. Divorce attorneys help during this process. Once a case has been resolved, spouses must follow the terms of the written settlement agreement, which has guidelines on resolving all matters pertaining to the divorce, from debt to things like custody and alimony.
A divorce settlement agreement stands out because it is a binding contract between ex-spouses. The agreement is usually included in a final divorce judgment, making it a very important guiding factor on all contentious divorce matters.
While you need an agreement enforceable by law, a divorce settlement agreement takes time. It is also a costly affair. What’s more, your affairs are decided by a judge. Divorce settlement agreements are great if you have a seasoned divorce attorney from the onset to ensure the final judgment favors you. Otherwise, you should consider an out-of-court settlement, if possible, to save time, anxiety, and money.
Many factors dictate how debt is divided in a divorce. To avoid problems such as aggressive creditors, bad credit scores, liability for new debt, etc., talk to a seasoned Alabama divorce attorney that understands debt matters during a divorce.
Don’t Go It Alone
You worked hard to put your lives together. Now, as you consider joining the 40 to 50 percent of other couples experiencing the same challenges, you may need help carefully separating the pieces again. It’s not an easy process, but with the right family law attorney, you can leverage the ways that debt in divorce is treated and come through the experience more financially prepared. Talk to a professional in The Law Offices of Charlotte Christian and Associates by calling us at (256) 769-0508 or contacting us through our contact form.