Debt and Divorce

By July 7, 2015Divorce

When people begin the divorce process, most think of custody first (if they have children), financial support and what property they will claim.  The property component is interesting, because many people think of property only in the positive or asset side of the equation.  But property also means liabilities – debt.

Missouri law specifically instructs the court to set aside to each person his or her separate property and to equitably divide the marital estate, which includes both assets and liabilities.

Too many people overlook the significance of the “setting aside” of the separate property.  For example, if one spouse has a credit card in his or her name only, that spouse may want to “claim” that card as separate property, i.e. it is “my card.”  But once a spouse claims the card as separate, the spouse becomes responsible for all the debt associated with that credit card.

In reality, designating an account as separate or marital does not end the conversation over debt, but rather just begins the inquiry.  Separate property is property owned by a spouse prior to marriage and maintained as separate during the marriage.  Marital property is any item purchased during the marriage – which includes the debt to pay for that item.  So, the law begins with the premise that anything purchased during the marriage is marital property unless a party can show otherwise.  With regard to debt, more spouses should think about how this plays out in terms of a fair distribution of property.

For example, if the parties used a credit card in the name of one spouse to purchase living room furniture, and that debt remains unpaid, and the other spouse wants that living room furniture, the spouse with the name on the card will want the debt to go with the asset.  But the courts do not always do it that way, instead looking to evenly divide the net of assets over liabilities for each spouse – a method that will not work fairly if the spouses do not earn the same income.  In that case, the “net” becomes a potential source of future bankruptcy.

As another example, one spouse may have large student debt that was incurred prior to marriage and brought into the marriage.  The other spouse will not want to be responsible for that large debt and assert it is separate property.  The court could do that, and often does, but should the court consider that separate property in handling marital debt?  If it is labeled separate property, the court should not consider it with regard to dividing marital debt because it results in the other spouse subsidizing the cost of separate property, which the law does not allow. But it also may make it hard for the spouse with college debt to pay off marital debt as well without filing for bankruptcy.

So, as you can see, how an asset – or liability – is classified heavily impacts how that debt must be paid and by whom.

Creditors, however, take a much different view.  If two parties have signed up for a purchase, those parties remain equally liable for the debt, whether a $20 gift certificate or a mortgage.  In order to protect yourself from being responsible for too much marital debt, you must ask the court to both make the other spouse responsible for jointly held debt and have that spouse hold you harmless if that spouse defaults on that debt – meaning that the creditor cannot come after you for payment.

Finally, remember that any debt with your name on it becomes a reportable item on your credit report.  It will be critically important to print out a credit report before you finalize your divorce to make sure your spouse has no hidden debt placed in your name, and to closely monitor your credit after divorce to be sure all debt awarded solely to the other spouse is removed from your credit rating.

If you have questions about debt and divorce, contact us – we can help.