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Dividing Debt During Divorce

How Debt is Divided During Divorce

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USA, New Jersey, Jersey City, Couple arguing
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Just as marital home and other assets, marital debt is considered marital property and must be dealt with during the divorce process. There are two options when dealing with marital debt during divorce.

  • Pay off all debt before filing for divorce.

  • Decide who is responsible for which debt during settlement negotiations.

The problem with dividing debt during divorce settlement negotiations is…your ex may not pay what he/she is ordered to pay. That leaves you still responsible for payment of the debt since lenders do not recognize divorce court orders.

Best practice would be to pay off all debt before filing for divorce. Doing this allows you to make a clean break financially from your ex. No worry about whether he/she is keeping up payments on loans that still have your name on them.

If you are unable to pay-off debt before filing for divorce, it will need to be divided during the divorce process. When dividing debt the court will determine who incurred the debt and who benefited most from the debt.

For example, if your spouse buys expensive golf equipment and plays golf every weekend, it would not make sense for you to be responsible for paying a debt that he gained enjoyment from.

As a rule, only joint marital debt will be divided by the court. Meaning, only joint debt that both spouses benefited from. A home, auto or any debt incurred in the hope of establishing marital property is considered joint marital debt.

There are two types of debt:

  • Secured Debt:

    When dividing secured debt the division is offset by the value of the asset securing the debt.

  • Unsecured Debt:

    Unsecured debt is apportioned so that each spouse receives an equitable or fair share of the balance of the marital estate.

The division of debt will also depend on whether or not you live in a community property state or equitable distribution state. In a community property state, you are responsible for debt incurred during the marriage whether your name is on the debt or not. For example, you are responsible for the home mortgage even if your name is not on the mortgage paperwork.

In an equitable distribution state, you are only responsible for debts with your name on them. So, be careful when buying property that you feel both should be responsible for paying. If your name alone is on the debt, you alone will pay it off if you should divorce.

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