Dividing Debt in a Divorce

Dividing Debt in a Divorce

Marriage is more than a legal relationship. It is a union of finances as well.  Money problems are always one of the top reasons for divorce. There is no question that money problems can erode the fabric of relationships.

The circumstances of every divorce are different, of course, but in many cases, untangling the finances in a divorce is a large part of the battle.  Divorce, however, doesn’t fix those money problems. In fact, it often creates additional ones for each spouse—particularly if there’s only one financial breadwinner.

Most people want to emerge financially separated from their former spouses. The process is wrought with emotion during a time when important decisions need to be made. Often, those going through divorce get tied up in the grieving process and fail to make good decisions regarding their finances and credit.

As financial professionals, it behooves us to identify and reduce the financial stress factors plaguing divorce-bound clients by helping them develop better communication strategies about their finances and money problem-solving techniques. In the case of money problems, divorce is a permanent solution to what may be a temporary problem.

Many couples going through a divorce have some form of debt in their lives. Before a divorce is final, each party is expected to fully disclose their financial information to each other and to the court.  This data falls into four categories – income, debt, assets and expense.

Each party should gather this information, run a credit report, and provide any relevant financial information before they can negotiate the financial terms of their divorce. Clients should be prepared to expose themselves financially. Whether it’s to their lawyer, soon to be ex-spouse lawyer, or a judge, they will be expected to reveal all the details of their financials. For many individuals, this could be very uncomfortable, especially if they are ashamed of something or have been hiding something that they would prefer not to disclose. As a mediator, it is my job to help the parties understand that the information is essential and will be used to calculate income, expenses, what they own (jointly and personally) and what they owe (jointly and personally).

The accuracy of the collected information is essential to a successful mediation so as to achieve a financially fair and equitable settlement and to determine appropriate amounts of child support and or spousal support, if applicable. Inaccurate or incomplete financial information can create problems for the client, their spouse, and their children in the long run, and may delay the process of settlement, which causes higher than anticipated legal and other fees.

As a general rule in Florida, an equitable distribution state, both spouses are responsible for debt that either spouse incurred during the marriage (often referred to as “marital” debt).  Debts incurred by either spouse during the marriage, regardless of whose name is on it, are generally deemed to be marital debts, and both spouses are considered equally liable. So, even if the debt was incurred by one spouse alone, both might be liable for it. However, keep in mind that debts incurred by a spouse prior to marriage or after separation or divorce are not considered marital debts.  Usually, if the debt was incurred for something that benefited the marriage, it will likely be deemed a marital debt. But if it was a purchase that only benefited one spouse, there is a greater likelihood that it will not be considered a marital joint debt.  Spouses can also have “separate” debt. This usually refers to obligations that arose prior to the marriage, and these would continue to be the sole responsibility of the spouse who initially incurred them. In certain unique circumstances, a judge might consider a debt incurred during the marriage to be a separate obligation, belonging only to one spouse. Let’s say a spouse is having an affair, and in furtherance of that relationship accrues substantial credit card debt for things like gifts or expensive trips with the third person. Divorce laws may allow a judge to hold the philandering spouse solely responsible for those credit card expenses.


Dividing marital debt is a balancing act. In an equitable distribution state like Florida, it all boils down to fundamental fairness. Preparing to address debt distribution in a divorce is a carbon copy of preparing to divide assets—you make lists. Identify all the debts. Then break those debts into categories by responsible party.  This gives the parties a full picture of assets and liabilities so that they can begin to negotiate how to divide it all up.

It is important to note that not all debts are created equally. Some are considered better than others. Indeed, while debt comes in several forms, all personal debt can be categorized within a few main types: secured debt, unsecured debt, tax debt and divorce debt.  Understanding how debts are classified—and how the classifications work—can help with the financial decisions in a divorce.

  1. Secured debt is any debt backed by an asset for collateral purposes. A credit check is necessary for the lender to judge how responsibly debt has been handled in the past, but the asset is pledged to the lender in case the borrower does not repay the loan. If the loan isn’t paid back, the lender has the option to seize the asset. Mortgages are the most common and largest debt many consumers carry. Mortgages are loans made to purchase homes, with the subject real estate serving as collateral. A mortgage typically has the lowest interest rate of any consumer loan product, and the interest is often tax-deductible for those who itemize their taxes. A car loan is another example of a secured debt. A lender supplies you with the cash necessary to purchase it but also places a lien, or claim of ownership, on the vehicle’s title. In the event the car buyer fails to make payments, the lender can repossess the car and sell it to recoup the funds. Secured loans like this have a fairly reasonable interest rate, which is generally based on creditworthiness and the value of the collateral.
  2. Unsecured debt is solely based on an individual’s creditworthiness.   Unsecured debt includes most student loans, credit cards, bank overdrafts, medical bills, personal loans, and even gym memberships for which you sign a contract to pay. No property is not pledged as collateral, but the lender will check the credit history and income before advancing the loan. Interest rates, therefore, tend to be higher for these loans than for secured loans, and are seldom or only partly tax-deductible.  Special note on loans from family members.
  3. Student loans are a special type of unsecured debt. They are usually owed to the federal government, though there are also private student loan providers. Federal student loans are typically offered at a low, fixed interest rate and are paid down over a lengthy period of time, while private loans might offer terms with either fixed or variable rates.
  4. Tax Debt: Joint tax debt owed by divorcing couples is considered like any other type of marital debt and will be included in the same category as outstanding credit card bills, mortgage balances, and other debts.
  5. Divorce Debt: Debts incurred in connection with the divorce.

Sometimes it easier for a couple to divorce one another than it is to divorce their creditors. That’s because no matter what a couple has agreed to or what is spelled out in the marital settlement agreement, and even with a divorce decree in hand, there is a contract with the creditors and whoever is legally responsible for paying off any the debt, will ultimately be the one responsible.  It’s important to remember that divorce doesn’t absolve the parties of their responsibility for accounts with their name on it, despite what the divorce decree may say. Even if the divorce decree assigns the former spouse responsibility for certain accounts in the name of one spouse (or in the name of both partners), any missed payments or default on an account with the name of one spouse on it will still be reflected on their credit report.

Divorcing parties may agree to distribute responsibility for the debts in a way that is different from the parties’ contractual obligations to pay, but their settlement agreement or a judge’s order does not change the parties’ contracts with their creditors. Each spouse is responsible for the other’s debt if they agree to pay or not or if a judge orders him or her to pay it.  A divorce decree that makes the termination of the marriage official and a marital settlement agreement that spells out both parties’ rights and responsibilities – is legally binding.

If the settlement agreement says that one spouse is responsible for a debt that is in the other spouse’s name, he or she is legally obligated to pay it. However, the court order does not cancel the original contract with a credit card issuer.  If a credit card is in the name of one spouse, the creditor can come after that spouse if the other spouse does not pay a debt as ordered. The same is true for the other spouse’s debts that the other one is ordered to pay. The recourse is to pursue the former spouse in court. Many attorneys agree that this can be a difficult and expensive journey full of headaches.

Credit history and credit score are tied to the individual alone and does not change whether or not the person gets married, and they do not change when the person gets divorced.  It is best for divorcing parties to get rid of accounts that could adversely affect the non-responsible party from the debt.  If possible, they can work together to pay off and close existing joint accounts or inquire with the creditor about converting the account to an individual account in one party’s name to protect the other party’s credit.  As a last resort and in case the responsible spouse doesn’t or can’t refinance or transfer the debt to an individual account, the marital settlement agreement should indicate who is responsible for paying what, and include indemnification clauses, which can stipulate liability and consequences for failure to pay.