Di­vorce and Debt

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