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Divorce and Debt

What Happens to your Debt After Divorce?

Separating Debt during a divorce is similar to the way in which property is divided; it will be categorized as either separate or marital. If you brought the debt with you into the marriage, then when you become divorced this debt will leave the marriage with you. However, usually anything purchased or that caused debt during the marriage will be the responsibility of both partners. Even if one spouse gets the house and the other gets the car, both will still be responsible for payments if both names are on the deed or loan documents. Therefore, if the spouse gets behind in the house payment, the creditor can seek payment from the other spouse and the same goes for any type of debt where the debt was a joint venture. However, in many cases, if the judge orders that the house goes to one spouse and they are solely responsible for the payments then the other spouse cannot be held accountable. The spouse that is no longer responsible because of the court order will need to notify the lender so their name can be taken of the debt. This type of debt is usually with items that are secured debt and may not include such as credit cards.

Understanding types of Debt

Secured debt is when property is put up as collateral for the debt. The property will then have a lien against it until all payments have been made in full. This means if you or your spouse falls behind in the payments and both names are on the lien, the company can seek payment from both partners, or repossess the property that is on the lien. However, if the judge orders that one spouse pay off debt, and that the other spouse has no responsibility for the debt, only the one ordered to pay can be held responsible for the re-payment of the lien. Secured debt includes such things as mortgages on real estate, boat loans, car loans, and furniture loans.

Unsecured debt is when there is no lien placed on any certain property. These types of debt include personal bank loans, lines of credit, loans from family or friends, and credit cards. The lender has no property that he can repossess.

Tax debt can occur and if you filed jointly, you are liable for the tax debt even after the divorce. The Internal Revenue Service or IRS can perform an audit on your joint tax return for up to three years and longer in cases of failing to file or fraud. If the joint return shows any debt, both spouses are responsible unless the divorce papers specifically points out what happens if any penalties, taxes, or interest costs arise with a prior tax return. There is also a rule where the innocent spouse did not know that the other spouse understated the tax amount due on a joint return. There are conditions and rules that apply, however, so it is best to get the protection in your divorce papers.

Divorce can be very expensive and when it comes to paying court costs, attorney fees, etc..., one spouse can seek a court order to make the other spouse pay all the fees incurred during the divorce. Many times the spouse that stays at home and does not work outside the home or the one that makes the least amount of money will seek this type of court order. Many times, the judge will order the spouse that is working to pay all attorney fees and court fees for both spouses in cases in these cases.

If both partners are working, then each spouse will normally pay their own attorney fees. In general, any other costs for such things as appraisals of the home, family business, or pensions will be divided between both parties. All of the divorce debt will have to be discussed and placed in the divorce documents as to which party will be responsible for any of the debt incurred during the divorce for reasons of the divorce.

Debt that occurs during the separation and divorce unless it pertains to the actually divorce proceedings such as attorney fees, appraisals, etc... is the responsibility of the party that ran up the debt. There is however, one exception to the rule, in case one party cannot afford to pay for such things as medical care, shelter, clothing and food the other party may be deemed responsible until the divorce is final.

Rules for joint credit card debt and divorce

When it comes to joint credit card debt in most states either party can be held responsible for all of the debt and not just one half.

Example: John and Tina are in the process of getting a divorce. John had his own personal credit card through his business that he always used and they both had a joint credit card for household expenses. During the divorce, John learns that Tina has ran up $40,000 in debt on their joint credit card purchasing clothing, Tupperware, Avon products, and other personal items. Since they live in a community property state, all the assets and debts will be divided in half. These means that John will have to pay $20,000 of the debt because the divorce settlement is not binding on creditors.

These types of issues should be discussed with your attorney to learn the law concerning joint type debt in the state in which you reside.

Bankruptcy after divorce

Your spouse can file for bankruptcy after a divorce and include money that is owed to you through the divorce. If they claim the amount of money they were ordered to pay on their bankruptcy, then you will never recover the money.

Example: Assume that Nicholas and Sandra wanted to divide their assets 50-50. After assigning the house to one and the pension to the other, Nicholas still owed Sandra $40,000. Nicholas signed a property settlement note to Sandra, promising to pay her $40,000 over a five-year period at 7 percent interest. After the divorce, Nicholas filed for bankruptcy and listed the note as one of his debts. The debt was discharged, and Sandra never received her money.

However, child support and alimony cannot be discharged in bankruptcy. It would be best in situations such as the above to use alimony as an alternative way to settle a property note.

Remember, also just because your spouse filed bankruptcy, it does not guarantee that the lenders will not try to collect the debt from you especially in cases of joint purchases.

Dividing Debt

There are five major options in distributing debt during a divorce, which include:

  • You and your spouse can sell joint property to raise the cash to pay off your marital debts.
  • You can agree to pay most of the debts. In return, you can request a greater share of the marital property or a corresponding increase in alimony.
  • Your spouse can agree to pay the bulk of the debts. In exchange, your spouse may get a greater share of the marital property or increase in alimony.
  • You and your spouse divide the property and debt equally; that is, each of you gets one-half of the property and each of you agrees to pay one-half of the debt.
  • If you are a homemaker with children, your spouse might be ordered to pay the bulk of the debt, pay alimony, and perhaps allow you to keep the house and a portion of other significant assets, such as your spouse's pension.

Because of the threat of bankruptcy and/or damage to your credit report, it might be wise to sell joint assets to pay off debt, or to assume responsibility for the debts yourself.

Repairing credit after a divorce

All credit problems tend to stay on your record for seven years however, bankruptcies can remain for ten years. There are a few things you can do, however, to repair your credit during the divorce and they include:

Get a copy of your credit report and check for any discrepancies. You can talk with a credit counselor if you do not understand everything that is on your report and also learn how to clear up any errors.

You can apply for a secure credit card through your bank and make payments on time. Making payments on time can help to repair your credit but it will take some time.

Questions to consider

The very first thing you should do is to separate your debts into ones that you had prior to the marriage and any debts that occurred after you were married. Also, make a list of any joint debt that you may have including credit cards, mortgages, etc. Here are a few other questions you should ask yourself:

  • Do you wish to keep certain marital assets?
  • Will you have enough money to keep up the loan payments?
  • Should I liquidate other assets to retire the debt completely (or partially)?
  • If my spouse proposes a property settlement agreement, is there any likelihood that he or she would subsequently declare bankruptcy?
  • Can I collateralize property settlement notes from my spouse so that bankruptcy will not eliminate his or her obligation to me?
  • If, pursuant to our divorce agreement, my ex-spouse assumed responsibility for all credit card debt, what are my legal remedies if he defaults? How can the divorce agreement be enforced?