Divorces, for the most part, are emotional and messy. Both sides fight about joint money, possessions, and debt. It can be hard for two people, who bought and invested together, to suddenly decide what goes where. Money is especially hard to divide. There are many concerns and obstacles that go with that, including debt.
One part of the couple makes a lot more than other. Kids, and who gets custody, also helps determine where the money goes. Retirement investments, shared bank accounts, assets like the home, cars, and pets. Even debts you’ve accumulated play a role. So, how is debt handled during a divorce? Let’s take a look at it:
1) The Laws on Debt Responsibility Vary by Area
If you live in a community property state, like Texas, Nevada, New Mexico, Wisconsin, and others, the both parties are responsible for their debt under the law. Debt responsibilities cannot be shifted by one spouse to the other. There may be a few exceptions to the rule here, but for the most part, debts will have to be paid off together.
Equitable distribution states, which are most of the states in the U.S., looks to what is fair. What’s a fair breakdown of the debts? Both parties get to decide to claim what they think is right and legal under the law, include both assets and debts. Here, one individual can decide the other party took out most of the debt and should be the one who pays it off. That would be a reasonable argument they could make in court.
2) Who Signed the Contract?
In the case of your lender, they don’t care you’re separating. If you signed the contract, the place is yours and in your name. If both of you sign it, both of you are responsible for it. You got the loan to borrow the money and the obligation you made, putting your name on the dotted line, is what is binding. Moving out, changing your name, getting a new address, etc., doesn’t matter either.
3) You Still May Be Hounded
If your spouse is getting behind on paying some of the bills, the creditors can come after you. That’s true even after a divorce. Your name doesn’t even have to be on the account and you can be legally divorced. They will still come after you. There are some ways out of it. For example, if you live in a community property state, you can put a clause in the divorce settlement. That lets anyone know you are not responsible for the debt.
4) Student Loans aren’t Shared
The person responsible for paying back their student loans is the one who took them out. This is not a case in which the loan will fall on both of your shoulders. Your ex’s student debt won’t follow you into a divorce. But, it might if you agree to help pay for the debt as part of the prenuptial agreement.