How is debt handled during divorce?

On Behalf of | Feb 28, 2022 | Divorce, Property division

As part of creating their joint life, many couples incur debt during marriage. In the event of a divorce, those debts must be addressed as part of the property settlement. If the couples have a premarital agreement, then the division of debts may already be decided. Parties have the option in a “prenup” to divvy up debts and assets in a manner that provides guidance during a divorce.

Without a prenuptial or postnuptial agreement in place, the couple must then figure out a property settlement that splits up debts and assets alike.

Handling joint debt

If debts are in both spouses’ names, then it is most often split between the parties. This means that each one is assigned a portion of the debt in the settlement agreement. It doesn’t change the fact that creditors can still hold them both legally responsible for paying the debt, though. Even if one party is given a debt in the property settlement, creditors don’t have to honor a divorce decree. Responsibility still flows to whoever’s name is on the debt.

One way to get around joint liability is to refinance joint debts such as auto loans and mortgages, and to have authorized users removed from credit card accounts and those in which one spouse was a joint account holder because the other didn’t qualify on his or her own. The credit card company could decline the request to remove one party if the other still isn’t eligible for an account.

If one spouse co-signed a loan or is listed as a joint account holder, then this process can be much more difficult. When a refinance is not a viable option, then both parties remain responsible for the debt.

Separate debts

Should a credit card, loan or medical bill be in one spouse’s name only, then that person alone is generally liable for it. If, for example, medical expenses were accrued for a child during the marriage, then both parents could still be on the proverbial hook. In that case it’s common practice to specifically address those payments as part of the property agreement.