Tips for Handling the Five Most Common Joint Debts to be Divided in a Divorce

rsz the marks law firm retirement and divorce

When going through a divorce, many clients view the splitting of assets as a priority, but what happens with debt during a divorce is just as important, with financial implications that last for years.  Every divorcing couple is in a unique financial situation and in Missouri dividing debt is an equitable division where the court considers a couple’s total financial picture when dividing debt incurred in joint name.  An equitable division does not mean each spouse ends up with 50% of the total debt.  Rather, the court considers what is fair along with a spouse’s ability to pay.  So, a spouse who has a higher annual income, or is awarded more property, may also be assigned more debt.

If dividing debt during a divorce is going to work out in your favor, then complete financial information must be fully shared between spouses.  Regardless of how debt was incurred or who was the spouse in charge of paying the bills during the marriage, the division of debt during your divorce should be a team effort.  Having full disclosure between spouses will result in less financial damage after divorce, including any potential damage to your credit score and credit report.

Different types of debt are handled differently during a divorce.  Let’s look at the five most common types of debt divided in a divorce.

1. Credit Card Debt in Your Name Only

It is true that all debt is marital debt until you are divorced.  However, that doesn’t mean that credit card debt you incur in your own name will be divided in the same as credit card debt in joint names.  This is important to consider when separated.  Instead of assuming the court will simply lump your individual credit card debt into the overall division at divorce, assume that you could be held responsible for all credit card debt incurred only in your name in a divorce.  The court will look at your purchases – especially after separation – to determine whether a purchase was for the family or just for you.  If a purchase was just for you then the court will need to consider whether it was a necessity or a luxury purchase.

2. Credit Card Debt in Joint Names

In a Missouri divorce, both parties will likely be responsible for credit card debt on a card held jointly.  This usually applies even if one spouse was the one who used it the most or made the payments.  The court will still look at specific purchases and look at whether those purchases were made for the family.  Additionally, a court could decide that one spouse is able to pay more than the other and divide the debt accordingly.  Don’t assume going into the divorce that the court must divide all credit card debt in joint names equally.

Keep in mind that when a credit card account is held jointly, you can’t simply remove yourself from the account.  As a result, you should make sure all joint credit cards and lines of credit are closed as part of the divorce settlement.  Also, watch out for a spouse who tries to transfer balances from their individual credit card accounts to joint accounts or who runs up the balance on a joint account during the divorce to make you liable for debt you were unaware of at the end of the divorce.

3. Mortgage Debt

The title to the home and mortgage debt are not always in the same names.  The name(s) on the title are the owners of the home.  You need to determine whose name(s) are on the mortgage as being responsible for paying the loan.  If you are the spouse who is not keeping the home, then you must make sure your name is removed from the mortgage and the title.  There are two options for this to occur.  The easiest solution is to sell the house, pay off the mortgage at closing, and split the net proceeds with your (ex) spouse.  Even if you want to keep the house for the stability of your children, selling, paying off the mortgage, and splitting the net proceeds is usually the best strategy because it allows both spouses to start over with a clean slate.  If you decide that one spouse will keep the home, then that spouse will usually have to buy out the other spouse’s equity and refinance the mortgage into his or her sole name within a defined period.  Again, if you are the spouse who is not keeping the home, then you must make sure your name is removed from the mortgage and the title. 

4. Auto Loan Debt

An auto loan that is in both spouses’ names can be a real problem in a divorce.  In most cases, one spouse will keep the car and be responsible for making the monthly payments.  This is a difficult result for divorcing spouses.  The failure of one spouse to pay for the auto loan results in both spouses having negative credit.  This forces the spouse who isn’t in possession of the car to choose whether to have the negative credit rating or pay the monthly payment, late fees, default, and/or collection costs and then take their former spouse back to court to recoup those monies.  When divorcing, you should determine if the auto loan can be refinanced, however, often this is not possible as the car is a depreciating asset, and the loan may be higher than the fair market value of the car.  You can request that a provision be put into the Marital Settlement Agreement that automatic payments shall be taken from the checking account of the spouse receiving the car to ensure that the payment is made each month.  You can request that the auto loan be paid off with house equity (if the marital home is being sold as part of the divorce) or some other asset being awarded to the spouse receiving the car at divorce.  Last, if the payment is simply not affordable, you can request that the car be sold or traded in to remove your name from the auto loan at divorce.  As we mentioned above with the marital home, the title of the car and the auto loan are separate things.  Be sure to address both at the conclusion of your divorce.

5. Medical Debt

In Missouri, the court will consider whether the spouses were living together when the medical debt was incurred.  Debt from a necessary or emergency medical procedure for a spouse will usually be viewed as a marital debt and differently than an elective or cosmetic surgery.  Medical debt incurred for a child’s birth, illness, or injury will also be viewed as a marital debt regardless of whether the spouses were living together when the medical debt was incurred.  Elective procedures such as orthodontia may be viewed differently by the court if both spouses were not part of the decision-making process or one spouse rushed to incur the costs because she or he knew a divorce was forthcoming.  The court will decide based on the facts of each divorce case and will take into consideration each spouse’s income when determining what percentage each spouse will pay toward medical debt.

What Should You Do?

If possible, you and your spouse should try to pay off your joint debt before finalizing the divorce.  If that’s not possible, agree with your spouse on how to split obligations, so that both of you understand what is required after divorce and are able to follow through with the terms of that agreement.  Keep in mind that mortgage lenders, auto lenders, credit card companies, and medical providers are not parties to your divorce judgment.  They just want to be paid in full.  So, from the creditor’s perspective, if your name is on a debt, you are responsible for payment regardless of what is contained in your divorce judgment.  To avoid issues with dividing debt during or after divorce, (if possible) pay off and close all joint debts and credit card accounts before finishing the case.  If not possible, then make sure your judgment has provisions for selling the marital home or refinancing the mortgage loan, addressing the car loan, and all unsecured debts.

Should you need the advice of an experienced divorce attorney or have questions or concerns about your divorce situation, know that we are here to help and ready to discuss those issues with you.