Creditors Rights upon Divorce

Upon deciding to get divorced, most people are preoccupied with concerns about how the divorce will change their lives. They are probably thinking about what shared assets (cars, houses, money) they can keep and what they will have to give up. However, they may not immediately consider that the shared assets generally also represent shared debts.

Most likely, the divorcing couple will have loans on their home and cars and credit card debt. Understanding how debt will be divided once the couple is officially divorced is important because otherwise, there can be major financial repercussions.

It is also important to understand the laws of your state regarding property. Some states have community property laws, and some have equitable distribution laws. The laws in your state will be used to decide how your property is divided.
What Types of Debt Need to be Considered in the Event of a Divorce?

Below are some of the major types of debt that need to be considered when a couple divorces:

• Mortgage debt: The easiest solution to dealing with mortgage debt is for the house to be sold and any proceeds split after the mortgage is paid off. In many cases, the home cannot be sold, particularly where there are children. Usually, the house is given to the primary caregiver.
  • There can be problems when the spouses don’t agree on who should leave the home because if it is jointly owned, neither party can require the other to leave. If one spouse wishes to keep the house, it is a good idea to have the mortgage company refinance it only in that spouse’s name. The mortgage company typically will not just remove one spouse’s name from the mortgage without refinancing
• Car loan debt: This is another situation where it is a good idea to refinance any joint auto loans in the name of the spouse who will be keeping the car
• Credit card debt: Your spouse’s debt may follow you out of the marriage. This will be true if you have both names on a credit card, but it is also possible to be responsible for a card in your spouse’s name. It will depend upon whether you live in a community property or an equitable distribution state.

Other kinds of debt can be difficult to divide. Other loans that were taken on during the marriage and medical debt can create issues down the road.

What is Community Property, and What is Not?

When dividing property in a divorce or legal separation, each U.S. state is either an “equitable distribution” state or a “community property” state. The community property states are Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Puerto Rico also follows community property rules.

Community property is property (including debt) that both spouses own. It differs from separate property, which is owned by one spouse individually.

Generally, any debt a married couple obtains during the marriage is considered community debt. If the partners divorce or separate, both spouses must pay the debt equally in a community property state.

States that follow community property laws start with a strong presumption that anything acquired during the marriage is a community item.

In non-community property states, courts will divide property in a plan of “equitable distribution.” Under these laws, the property may be divided in a case-by-case manner according to what the court determines to be “fair” or “equitable.” This can be determined through an examination of various factors, including:

• How long the marriage arrangement lasted
• Whether any specific property agreements between the spouses might affect the property distribution (such as a prenuptial or postnuptial agreement)
• The financial condition of each individual spouse at the time they entered the marriage
• Characteristics of each spouse, including age, employment, and health
• The overall character and disposition of each person’s estate

Thus, property division for a divorce in an equitable distribution state might not follow an exact 50/50 split or division of the property. However, this is usually considered acceptable, as the court will seek to determine a division of property that is considered most fair.

What are Some Rules about How Debt is Split in Community Property States?

It is important to understand the difference between community property and separate property, as they are defined in a community property state. These general definitions are:

• Separate property: Property can be held separately if one spouse accrued it before marriage and keeps it separate during the marriage. The spouse can take that property with them upon divorce and will be solely responsible for any associated debts. It will be safe from the other spouse’s creditors. Other property that can be considered separate, even if received during the marriage, are gifts and inheritances.
• Community property: The spouses’ money, assets, debts, and efforts to earn them are considered co-mingled.

In a community property state, just as the community property assets are divided equally, so are the community debts.

What are Some Rules about How Property is Split in an Equitable Distribution State?

Property law works differently in an equitable distribution state. Both spouses signed Mortgages, and auto loans still belong to both equally, as assets and debts. This is because the spouses cosigned the loans. Loans and credit cards held separately may be considered the property of the spouse who took the loan out in their name.

What are Some other Issues to Consider?

Some other issues to consider in a divorce context include:

• Divorce decrees do not trump your state’s laws. You may agree that a spouse will pay off a certain debt, but if they do not, and you are jointly responsible for it, the creditor may still pursue you
• Bankruptcy can have a similar effect. If your spouse declares bankruptcy, a joint creditor can still pursue you for a debt even if your spouse agreed to pay it
• If you have lived in both community property and equitable distribution states during the marriage, you may have quasi-community property, which may make the division of assets and debts trickier

Should I Contact a Lawyer Regarding Divorce and Creditor Rights?

It is possible to obtain a divorce without hiring a lawyer; divorce proceedings can be very complicated, and property and debt distribution can be especially complex. An experienced divorce lawyer in your area can help determine how your state’s laws will affect your divorce. Working with a divorce lawyer can help ensure you receive the share of assets you are entitled to and do not get stuck with an inequitable share of the debt.

A lawyer can also represent you in court if a dispute arises over the distribution of property or any other legal issues.