Debts - How to Value and How to Divide

Debts are financial obligations that individuals or couples owe to creditors, ranging from credit card balances to mortgages, loans, and other liabilities. When couples decide to divorce, the division of debts can be a significant aspect of the property settlement process. Understanding how debts are categorized, valued, and addressed in divorce is essential for a property division in divorce.

Defining Debts

Debts encompass various financial liabilities that may have accumulated before or during the course of the marriage. Common types of debts include:

• Consumer Debt: This includes credit card balances, personal loans, and lines of credit used for everyday expenses, purchases, or emergencies.
• Mortgages: Debts associated with real estate, including outstanding balances on primary residences, vacation homes, or investment properties.
• Vehicle/Automobile Loans: Loans or financing arrangements for automobiles, motorcycles, boats, or other vehicles used by either or both spouses.
• Student Loans: Educational loans incurred by either spouse for tuition, fees, books, or other educational expenses.
• Personal Loans: Loans obtained for various purposes, such as home improvements, medical expenses, or business investments.  These loans may be obtained from a financial institution or a private individual (like family).

First: Gather the Facts

Debts in divorce are typically categorized as either separate/non-marital, joint/marital debts or a hybrid of the two.  Like assets, marital/joint debts are those incurred during the marriage for expenses or obligations, regardless of which spouse incurred the debt or whose name is on the account.  Debts incurred by one spouse before the marriage or after the separation date, as well as debts that are explicitly designated as separate in a prenuptial agreement are often awarded to the party that incurred the debt alone.

Two Unique Debt Categories

Student loans may be treated differently than other debts.  If student loans were incurred for educational purposes only, whether before or during the marriage, they are typically awarded to the named party as separate/non-marital debts.  The assumption is that student loans are incurred to obtain education that results in income after school is complete.  Since each spouse takes their education with them after divorce, they also are typically responsible for their student loans free and clear of interest by the other spouse.  If any of the student loans, however, were used for marital expenses then that portion of the debt may be marital/joint.  

Another type of debt that may be excluded from the marital/joint pool of assets and liabilities in the property division analysis, is debt incurred by one spouse on another relationship. If a party dissipates marital asset by spending on a new significant other during the marriage, the other party may not be liable for those debts.  That portion of any debt may be treated as non-marital/separate property and remain with the party who incurred the debt.

Review all Information

In the divorce process, both spouses must disclose all debts owed individually or jointly, including outstanding balances, account numbers, and creditor information.  The outstanding balances of each debt are determined, taking into account factors such as interest rates, payment terms, and any accrued fees or penalties.  Once debts are identified and valued, they are allocated between the spouses as part of the property division process. In almost all jurisdictions, debts from during the marriage are divided equally between the spouses, regardless of who incurred the debt or whose name is on the account.  Spouses may negotiate a mutually agreeable arrangement for dividing debts, taking into account their individual financial circumstances, future needs, and other factors. Once debts are allocated, the division of debts should be documented in the divorce agreement or decree, outlining each spouse's responsibility for paying off specific debts.

Second: Understand the Law

It's important to consider legal implications when addressing debts in divorce. While divorce agreements may specify each spouse's responsibility for paying off certain debts, creditors are not bound by these agreements. Creditors may still pursue collection actions against either or both spouses if debts remain unpaid.  In cases of joint debts, both spouses may be held jointly and severally liable for the full amount of the debt, regardless of the division of responsibility outlined in the divorce agreement.  It is important to clearly document your agreements and then implement them as soon as possible after the divorce is final to avoid your name staying on a debt that you are no longer responsible for.  

Monitor Your Ongoing Credit

It's advisable for divorcing spouses to monitor their credit reports regularly to ensure that joint debts are being paid off as agreed and to detect any unauthorized activity or discrepancies.

Debts are an integral part of the financial landscape in divorce, requiring careful consideration and strategic planning to ensure a fair and equitable division. By understanding the nature of debts, categorizing them appropriately, and working together to address them in divorce, couples can minimize financial stress and lay the groundwork for a smoother transition after divorce.