Divorce and Debt

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If couple is to divorce and debt was acquired during the marriage, even if some of the charges weren’t for items the couple bought together, the debt generally will still be shared.  

It is important to understand that in addition to assets, such as stocks or a house, debts such as credit cards and mortgage loans are also marital property.  It may make little difference whose name the credit card is in. 

This is an important concept for many divorces are preceded by a period of financial hardship.  It may be that the couple is not fighting over who gets which possessions but over who is responsible for repaying certain debts.  If both spouses guaranteed repayment when the debt was obtained and the couple lacks the necessary funds to repay the loan the courts hands may be tied.  The fact that the spouses have a dispute with each other will not prevent a creditor from collecting against each of them or, in the case of a mortgage, foreclosing.

Another type of debt is Taxes Due

Federal income taxes will generally trump all other debts in the order paid.  When back taxes are owed, the combination of divorce and debt to the IRS is not uncommon. It is possible for the divorcing spouses to request a partition (division) of taxes due for the years when the spouses filed jointly. If granted, the IRS will specify how much of the past due taxes each spouse is responsible to pay.  Unfortunately, partitions are rarely granted however. This is because he IRS usually tries to get the back taxes from whichever ex-spouse can pay them.

From negotiating Divorce to negotiating Debt with Creditors

If the spouses do have the necessary funds to repay debts, such as credit cards, it will be helpful for the spouses to cooperate with each other in deciding how to handle these debts.  It may be possible to renegotiate the debt and pay pennies on the dollar, but this will likely damage the credit score of both spouses.  On the other hand, repayment of the full amounts due may leave both spouses completely broke.  If the spouses cannot agree, the court may leave the unsecured debts, including credit cards, unpaid.  Secured debts, such as mortgages, will often follow the property.  Thus the spouse who gets the house may, in turn, become responsible for paying the mortgage.

Practical problems of Divorce and Debt

Again, a practical problem exists.  Following the example of the house, if the spouses both signed for the mortgage loan and the wife keeps the house and agrees to make payments on the mortgage, but later fails to do so, both spouses will see their credit scores damaged.  Then, if the bank forecloses and the house ends up being worth less than the amount owed, the bank can then go after both spouses for the shortfall, regardless of the decisions reached during the divorce. 

The only way for the spouse, who is no longer responsible for repayment of the mortgage, to protect himself, would be to mandate that the ex refinance the property into his or her name alone.  A frequent problem is that the ex may not qualify for the refinance.

By Christopher Yannon

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