Chapter 17 How Will We Divide Debts?

• Library: Divorce & Money (Nolo) (2020 Ed.)

CHAPTER 17: How Will We Divide Debts?

General Rules on Who's Responsible for Debt

If You Live in a Community Property State

Listing Your Debts

Marital Debts and Bankruptcy

Terms to Know

Types of Bankruptcies

Dividing Debts at Divorce

Dividing Debts When There's Nothing to Fight Over

Questions to Ask a Divorce Attorney

Questions to Ask a Bankruptcy Attorney

When you divorce, you divide not only property but debts as well. It's crucial that you and your spouse reach an agreement about how debts will be handled.

If you are willing to assume a debt, you might ask for something in return. You may be able to make trade-offs—perhaps getting the car or the piano in exchange for paying off credit card debts.

Before negotiating your agreement, you'll want to know what your state laws have to say about who is responsible for what debts. You also need to be aware of the possibility that your spouse will declare bankruptcy, default, or fail to live up to your agreement in some other way. Use this chapter to investigate your legal and financial position on debts and divorce.

General Rules on Who's Responsible for Debt

Some general rules for separated, divorced, and married people having financial problems follow. Study these rules to understand which debts you are obligated to pay and which property you risk losing if you don't pay:

• In noncommunity-property states, a person is responsible for paying only the debts that person incurred during marriage—that is, you can't be forced to pay the bills your spouse runs up—except that both spouses are usually responsible for paying debts incurred:

■ with joint accounts
■ where the creditor was looking to both spouses for repayment
■ for the family's necessities, such as medical care, food, clothing, and shelter, and
■ for the children's education.

• While your spouse's creditor may not be able to come after you directly, the court will take the debt of both parties into account when dividing property, so you may end up paying indirectly.
• Usually, debts incurred after the separation date but before the divorce is final are the responsibility of the spouse who incurred them and must be paid by that person. There is an exception—both spouses are responsible for paying debts for the family's necessities and the children's education, regardless of who incurred them.
• A spouse is generally not responsible for paying the debts a mate incurred before marriage or after the divorce became final.
• If either you or your ex-spouse agreed to pay certain joint debts as part of a divorce settlement—or if a divorce decree signed by a judge requires that one spouse pay the joint debts—the agreement or decree is binding only on you and your ex. Because you were married when the joint debts were incurred, the creditor has a right to collect from both of you, and no agreement between you and your spouse can change that. If you pay bills your ex-spouse was supposed to pay, whether voluntarily or involuntarily, your remedy is to try to get your ex to reimburse you. Complaints to the creditor will get you nowhere.
• The separately owned property of one spouse usually cannot be taken by a creditor to pay the separate debts of the other. Separate property of one spouse can be taken to pay debts you incur together, and separate property of one spouse is always available to pay that spouse's separate debts. (Separate property is property owned prior to the marriage, property accumulated after divorce, and property received any time, including during marriage, by one spouse only, by gift or inheritance. In a few equitable distribution states, separate property also includes wages earned by a spouse during marriage.)

Be Aware of Medical Expenses

State statutes often expressly state whether one spouse is liable for the necessities of the other. Are medical expenses always considered necessities? The issue of liability for a spouse's medical debts commonly arises in court these days. And there's no clear answer. About half the courts say neither spouse is responsible for the other; the other courts say that both are responsible to each other.

If You Live in a Community Property State

The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In Alaska, married couples can opt into the community property system. In South Dakota and Tennessee, spouses can identify property held in a trust as community property. In the community property system, property acquired and debts incurred during the marriage—called community property and community debts—are joint. In most instances, both spouses are liable for all debts incurred by either, although there are exceptions. Here are the rules:

• Both spouses are generally liable for all debts incurred during marriage, unless the creditor was looking to only one spouse for repayment or the purchase in no way benefited the "community." For example, if on a credit application a spouse who bought a kayak claimed to be unmarried or stated that the other spouse's income would not be used to pay the debt, the spouse would not be liable to pay for the kayak if the borrowing spouse defaults. Similarly, if a spouse charged a trip to the Bahamas with a lover, the spouse who stayed at home would not be liable, as this debt does not benefit the community.
• Spouses are generally not liable for the separate debts their mates incurred before marriage or after permanent separation. But a court order dividing debt between the parties at divorce cannot affect the rights of the creditor without the creditor's consent. Where the divorcing parties have joint credit, a creditor may collect from either party.
• Community property includes all income earned during marriage, except for income earned on property owned before the marriage. This would include revenue from an income-generating piece of property or payments from a vested pension.
• Separate property is limited to property owned prior to the marriage, property accumulated after divorce (after separation, in a few states), and property received by one spouse only, by gift or inheritance at any time, including during the marriage.

Listing Your Debts

Below is a chart on which you can list all your debts—yours, your spouse's, and your joint (marital) debts. The liabilities worksheet, which you filled out as part of your "Net Worth Statement" in Chapter 12 should contain all this data.

Using the examples as a guide, list in Column 1 all current debts you and your spouse are responsible for paying. This information can be taken from the "Assets and Liabilities Worksheet" in Chapter 12. In Column 2, write the balance owed on each debt. In Column 3, note whether the debt is your separate debt, your spouse's separate debt, or a marital (joint) debt. In Column 4, write in the name of the person who will assume responsibility for paying the debt. Only in unusual circumstances will one of you be responsible for the other's separate debt. You will need to divide the marital debts, however.

You may want to make several copies of this chart in the event you negotiate back and forth about who will be responsible for paying which debts.

Marital Debts and Bankruptcy

For many couples, debts and divorce go together the way love and marriage once did. Unmanageable debts may serve as a catalyst for the ending of the marriage in some cases. Other couples feel the pinch as their expenses double when one spouse moves out—they maintain two households, yet their incomes stay the same.

For couples or recently divorced individuals overwhelmed by...