Upon divorce the debt accumulated during the marriage is divided between the spouses. The same property considerations and laws that apply to the division of assets are applied to determining who is to repay which joint debt. Ordinarily, the debts that one spouse brings into the marriage (separate or non-marital debt) remain the responsibility of that spouse. Expenses that were incurred solely for the benefit of one spouse – such as a solo vacation or the costs of a hobby – may be left as the responsibility of the spouse who benefited. In most community property states, both spouses are equally responsible for the repayment of debt incurred during the marriage, even if only one spouse enjoyed the benefit.
A spouse’s educational debts are often treated uniquely. Who is responsible for them depends on the length of the marriage. Let’s use the example of one spouse (“He”) paying the medical school fees for the other spouse (“She”). Let’s say “He” pays Shelly’s medical school fees. Ten years after “She” becomes a doctor, “She” and “He” decide to divorce. Many jurisdictions will feel the salary “She” earned in those ten years as a result of her education has more than compensated the marital property. “He” is out of luck and can’t have that amount refunded back to him.
In a divorce, the property settlement agreement is not binding on any creditors or bill collectors or bank. That is important to understand and remember. Put simply, creditors are not parties to divorce cases. None of them care what or how the couple divvied up and assigned debts under the terms of the divorce judgment. For example, let’s say “She” is the recipient of the SUV and agrees to pay off the loan balance under the property settlement agreement. Tragically, “She” dies, goes bankrupt, disappears, or is simply slow in paying. The lending institution might look to “He” to pay, irrespective of what the property agreement says. The loan payments would then fall to “He,” who can count on plenty of creditor phone calls. Failure to pay puts “He” at risk of receiving a black mark on his credit report.
Figuring out what to do with marital debt can tax an angel. There are several strategies to assign debt (putting the debt in the name of the spouse who signed on the proverbial dotted line, for example) as well as legal safeguards to protect against the unwitting transfer of debt. For starters, any couple that separates should cancel all credit cards and have new cards issued separately to the spouses.
Again, venturing into this legal-financial wilderness without a competent guide is a reckless adventure. The information above is only a snapshot of the potential problems and is not even close to “full disclosure.” The short version: “Don’t try this at home.” Consult with a qualified attorney, CPA, and/or other relevant professionals before signing your property settlement.
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