It’s an unpleasant fact of life, but many of us have racked up a significant amount of debt. We’ve got student loans, mortgages, car payments, credit card bills, and more. When you marry, you start amassing debt for two - even more if you have children. This is a part of marriage which then becomes a part of a divorce. So the question is how do courts treat debt in divorce?
Figuring out how to allocate debt is just as tricky if not more so than dividing property in settling a divorce case. In short, debt and divorce go hand in hand. Marriage means you share everything, and that includes money owed. Even after things end, financial missteps can have a significant impact. It’s important to know what to expect moving forward.
KNOWLEDGE IS POWER
In divorce, a court may treat debt the same as it treats the assets, meaning that there may be an “equitable” division. Clients are often surprised to learn that this may even include debts they weren’t aware of. We recommend reviewing your credit report regularly to ensure that no debt has been taken out in your name. You should also be aware if your name is on the mortgage, car loan/lease or other liabilities that will need to be addressed in your divorce.
AM I ON THE HOOK FOR MY WIFE’S DEBT?
The general rule is that debt incurred during the marriage will be equally divided regardless of whose name is on the account. Even so, many factors may impact the division. Depending on how long you’ve been married, your respective incomes, and other factors, you may be sharing the debt.
It’s also important to look at whose name is on the debt, and what the debt was used for. For example, if your wife is not working and you have credit card debt in your separate name, you may end up stuck with that debt. This is for two reasons. Number one: if the debt is in your name, you are the only person American Express can sue to collect their money regardless of what a court order says. Also, it will not do any good to require your ex-wife, who has no income, to pay a debt in your name.
A better approach is to consider the amount of debt in the settlement of your entire divorce case, i.e. to get credit for this money somewhere else. It may make sense for you to pay your wife less money for assets or spousal support if you are the one stuck with the debt. On the other hand, you may not want to take fewer assets in exchange for debt your wife is assuming if there’s a realistic chance she’s just going to bankrupt.
It is also common for one or both parties to owe student loans. There is law that can allow a court to require you to pay part of your wife’s student loans, particularly if she borrowed them during the marriage to help cover joint living expenses while she was in school. If the money was borrowed for just the cost of education, however, it typically makes more sense that the person who got the degree is responsible for the debt. It may be a different story if you co-signed for her student loans. This is where the help from an attorney can be important. Tax debt is another complicated issue. Like student loans, tax debt is typically non- dischargeable in bankruptcy.
DIVORCE DOESN’T CHANGE LOANS
While ending a marriage affects nearly every aspect of your life, it doesn’t alter any financial agreements you made with outside parties. When you and your spouse establish a line of credit, those terms remain in place. Creditors are only obliged to honor the conditions as they appear on the initial agreements, and divorce doesn’t alter those. A divorce judge cannot undo a contractual promise you made to repay a bank, credit card or hospital so if your name appears on a home or car loan, divorce doesn’t change that.
If you agree that your wife will keep the house in your divorce, it can impact you if your name is on the mortgage. If your former spouse misses a mortgage payment, it negatively reflects on you. If it gets bad enough, creditors may come after you for payment or take legal action against you. This not only puts your credit rating at risk but it also impacts your ability to borrow as you move on with your life.
In that situation, you would want to require that your wife refinance the mortgage and remove your name from the debt. If that does not happen, then typically the only other option is to insist on the house being sold. If there is no choice but to award an asset to her with joint debt attached, there may be other measures that can be written into your judgment to protect you and your credit.
PREPARATION IS KEY
As with most issues when facing a potential divorce, understanding the law and knowing how it applies to your situation before you take action is imperative. There are many steps your lawyer can help you take in advance that will help you navigate and prepare to ensure that you don’t end up holding the bag on your debt.
About ADAM (American Divorce Association for Men)
The American Divorce Association for Men (ADAM) is a group of highly qualified attorneys who advocate for men’s rights in divorce, child custody and parenting time, paternity, support, post-judgment modifications, and other family law matters. Since 1988, ADAM has been aggressive, diligent, and uncompromising when representing their clients. A team of compassionate and skilled family law attorneys, ADAM is dedicated to being Michigan’s leading divorce attorneys for men.