While it is important to divide up the assets in a divorce, it is just as important to divide the debts. A marital debt is one that was incurred during the marriage. It does not matter in whose name it was incurred. If the debt was created during the marriage it is marital and must be addressed during the divorce process. This does not mean that every debt will be split equally and it does not mean that every debt will be counted when balancing the assets and debts to arrive at a fair division. It does mean, though, that all debts come into play and must be determined. So, how does this affect your divorce? Here’s what you should know.
- Determine first, all debts that are marital, potentially marital, or pre-marital. If a debt existed before the date of marriage, that does not usually get considered when dividing the debts. A pre-marital credit card debt of $10,000 will likely mean that if that same credit card has $20,000 on it at the time of divorce, half of that credit card debt will not be considered marital and won’t be divided between the Parties. If there is a pre-marital loan that was brought into the marriage, whatever is remaining to be paid on that loan will be solely the responsibility of the Party that brought it into the marriage. Sometimes, too, any payments made on the pre-marital loan during the marriage can be credited (reimbursed) to the other Party to some degree because “marital funds” were used to pay the loan during the marriage. Student loans incurred before the marriage remain solely the responsibility of the Party that has that loan and when balancing assets and debts, it will be ignored. However, if the student loan was taken out during the marriage, it is a marital debt and will figure in the balancing of assets and debts.
If a debt is incurred during the time Parties are separated but the divorce is not final, those are still marital debts. Sometimes, Courts will segregate debts incurred during the separation period but usually does this only when the debts are significant and both Parties have “post-separation” debt. Even then only when the matter is made a pivotal issue will the Court turn its attention to post-separation debt. In most circumstances, any debt incurred during the marriage—even during the separation of the Parties—is “marital” debt and will be considered for division.
2. How each debt is divided depends upon which of the Parties can pay the debt and what makes sense. If a Party has no income (such as a stay-at-home Parent of a Child under 2 years old or a full-time student in a qualifying program of study, etc.) it does not make sense to assign the payment of debts to this person since they have no ability to pay the debt. However, the Court can shift the burden by replacing spousal maintenance or balancing the assets against the debt so that the payor of the debt pays less spousal maintenance or gets more assets to offset the debt. Rather than paying $1000/mos. in spousal maintenance, a Court may award only $500/mos. and the other $500/mos. goes toward the payment of marital debts. Your attorney will help you decide the different options and choose what works best for you—or what the Court is most likely to order.
Sometimes it does not make sense to divide up a debt so that each Party is paying a portion of the debt. For example, with a student loan, it is much easier for the student to pay and monitor and administer the loan repayment than for an ex-spouse—especially because student loans often are repaid over many years. The Court would likely award the entire student loan repayment obligation to one Party—not both—but would balance out the debt by equalizing it with the other Party getting just as much debt or by awarding the payor more assets.
3. Credit card debt that is accumulated during the marriage is marital—regardless if the credit card is in one Party’s name or is a joint credit card. If the credit card is in one person’s name, that person will likely be awarded that debt to pay. It is easier and makes sense since that one person has access to the card and the debt holder. The Court would balance that debt going to one person by either awarding debt to the other person or by allocating more assets to the payor of the debt.
With joint credit cards, it gets trickier. It may seem as if the debt would be easy to divide with each Party paying ½ the monthly amount due—but think about it. If each Party is paying ½ of what is owed each month, that could mean many, many, many years of staying connected to a credit card (and an ex-spouse) on a monthly basis until the debt is paid off. And, how would you prevent the other Party from running up the balance and buying more things on the card? Also, if you pay ½ owed each month but your ex-spouse does not pay their portion, your credit score is impacted and there will be late fees and penalties. The credit card company does not care that someone else was supposed to pay a portion of what is owed. The company will come after both Parties and both will have their credit scores impacted and the balance on the card will increase with fees. Also, you cannot close a joint card permanently until it is paid off and it is unlikely that one Party can be “removed” from a joint credit card. A better solution for joint credit cards is to pay them off with assets awarded (with proof of the payoff and closure of the card) or each Party transfers part of the balance to a new card solely in their name and closes the joint card when it has a zero balance. Be certain to find a solution so the card is paid and permanently closed—and you no longer have that open card appearing on your credit report. Otherwise, you are at the mercy of someone who can harm your credit at a time you need all your financial resources available. Attorneys often have to get creative and find unusual strategies to extinguish joint debts. It is worth the attorney’s extra time and effort, though, to have a Client emerge from a divorce with a minimum of financial risk and damage to future credit.
(to be continued……)