For every two to three new marriages in 2014 there was at least one divorce, according to the latest Centers for Disease Control and Prevention data — a grim statistic that could easily kill deflate your inner romantic.
Breaking up a marriage is hard to do and it’s made all the more difficult by the financial implications.
The average price of a divorce, from start to finish, lands at around $15,500 (including $12,800 in attorney’s fees), according to a 2014 survey put out by Nolo, a publisher specializing in legal issues. If the legal expenses are one side of the coin, figuring out what to do with your joint financial assets and debts is the other.
We’ve talked about what happens to debt after you’ve married. Now it’s time to ask what happens to debt when you divorce.
Here’s everything you need to know, plus some tips for protecting your finances when a marriage ends.
Where you get divorced
When it comes to splitting up debts, the state you live in can sway the outcome in a big way. A majority are considered equitable distribution states, where the judge uses his or her discretion to divide up debt in a way that’s deemed fair and evenhanded.
Each state has its own set of laws and procedures, but Vikki S. Ziegler, a longtime matrimonial law attorney licensed in multiple states, says the court generally has more leeway in an equitable distribution state.
Simply put, the judge has the freedom to take multiple factors into consideration. This might include everything from one spouse’s income to another’s employment status.
The situation could play out much differently if you live in a community property state. These states are listed below, and in them, debt is viewed a bit differently.
- New Mexico
*Alaska has an optional community property system.
Community property states typically split all marital debt right down the middle, regardless of who actually accrued the debt. This means that if your spouse racked up hidden balances during the marriage, you’ll likely be on the hook for half. In community property states, the divorce process is typically more cut and dried than subjective.
“The most important thing for someone leaving a marriage to understand is how the law applies in each state that they are getting divorced in,” Ziegler told MagnifyMoney. “How are you going to allocate debt, and who’s going to be responsible for what?”
An experienced divorce attorney can help fill in the blanks.
The type of debt
The type of debt you have is another biggie. Let’s first zero in on secured debt, like a mortgage or car loan.
According to John S. Slowiaczek, president of the American Academy of Matrimonial Lawyers, whichever spouse decides to keep certain assets — such as the house or a car — will also assume whatever debt is left over.
“Debt associated with an asset will ordinarily be allocated to the person acquiring the property,” Slowiaczek tells MagnifyMoney.
Your mortgage: The loan will likely be the responsibility of both parties equally, unless it’s only in one party’s name. If you both co-borrowed the mortgage, you’ll have to decide who will keep the loan and who will exit if one partner wants the house. One way to get one name off a mortgage loan is to refinance the debt and put the loan under just one person’s name.
The equity built up in the home usually belongs to each party 50/50 as long as the title is held as joint tenants with right of survivorship or tenants by the entirety; don’t be intimidated by the legal jargon. All this means, essentially, is that you legally own the home together.
If you decide to sell the house, either the couple or the court will likely compel that process, after which you can divide the proceeds equally after paying off the debt.
If you’re planning on staying in your home, refinancing your mortgage before you divorce can help ease the financial blow. With divorce being as costly as it is, finding ways to trim your budget can better prepare you for a single-income lifestyle. Refinancing could do just that, lowering your monthly payment and potentially your interest rate, assuming you have good credit.
A lower bill may also make it financially possible for you to stay in the house, if that’s what you want. Plus, if you apply before splitting, you’re more likely to get approved since a combined income will likely make you more attractive to lenders.
Your car loan: The same usually goes for car loans — if one spouse wants to keep the vehicle, he or she could refinance the loan under his/her own name. Or you can sell altogether and divvy up the cash. As Slowiaczek mentioned above, remaining debt follows the asset, so whoever keeps the car will assume the debt.
Credit debt. The way nonsecured debts, like credit cards, are handled goes back to individual state laws.
In a community property state, Ziegler says the courts usually take a 50/50 view of marital debt. But equitable distribution states typically look at who contributed to the debt, how much money each party makes, and other statutory requirements that allow them to potentially allocate the debt differently. In other words, things aren’t as black and white, and the courts have more interpretive wiggle room.
Barbara, a 36-year-old sales professional in Tampa, Fla. is eight months into the divorce process. Florida is an equitable distribution state, meaning the debt she and her husband accrued could end up being split any number of ways. One of the toughest parts of her experience has been the $35,000 of credit card debt she says she shares with her ex.
“It was mostly accrued by [my husband], but mostly in my name,” she told MagnifyMoney. The couple also have a $202,000 mortgage, and deciding who will assume the mortgage (and the equity in the home that comes with it) has been a point of contention.
Ziegler says Barbara probably has more leverage than if she lived in a community property state.
Student loans. Generally speaking, Ziegler says the court is required to look at the purpose of the degree each spouse pursued to determine whether it’s marital or non-marital debt. Again, it really depends on the nature of the debt, who benefitted from it, and what state you live in, among other things.
For example, a student loan may be in your spouse’s name, but who’s making the payments? And which one of you is the primary earner? These things matter and could potentially play into your divorce agreement.
When you acquired the debt
One bit of good news: no matter where you live, Ziegler says premarital debts are off limits. Where divorce is concerned, the court is only interested in debts that were accrued during the marriage. The same generally goes for debt acquired post-separation.
How the debt was used
Every case is different, but the reason behind the debt can sometimes be argued. If, for example, debt was taken on for one spouse’s personal use, the other spouse might argue against being on the hook for it, depending on the property laws in the relevant state.
“Credit card purchases to buy groceries or make a car payment are obviously marital, but what about debt that was racked up for personal use, like [cosmetic surgery] or gifts for someone your spouse was having an affair with?” asked Ziegler. “It can be argued that those expenses are not marital debt and should be assumed by the individual.”
This underscores the importance of parsing out individual versus marital debts. To help make it easier, Ziegler recommends that couples maintain two different types of accounts: joint for marital expenses, and individual for personal spending. It’s also wise to keep your statements handy.
How to financially protect yourself during a divorce
Divorces don’t usually come cheap, but there are steps you can take to soften the blow.
Sign a prenup
Prenuptial agreements aren’t as taboo as they once were. According to a survey released by the American Academy of Matrimonial Lawyers (AAML) in 2013, “prenups” are on the rise; a whopping 63 percent of divorce attorneys cited an increase in recent years. This is because they serve as a loophole against state rules, dramatically simplifying the fight over debts and assets.
“Most prenuptial agreements say that if the debt is in either party’s name, it’s separate debt that cannot be allocated or redistributed for payment,” said Ziegler.
If you’re already married, it isn’t too late to protect yourself. As of 2015, 50 percent of AAML members reported an uptick in postnuptial agreement requests.
Safeguard your credit
Take steps to safeguard your credit before you divorce. As soon as you begin the separation process, do yourself a favor and make a list of all your individual and joint debts to get an idea of what you’re dealing with. Are you or your spouse listed as authorized users on any accounts? If so, cancel those straight away to avoid accruing any new joint debt. To make sure you don’t miss anything, pull your credit report and take a thorough look at your open accounts.
Ziegler also suggests making it clear in the divorce agreement who’s responsible for which debts — but that doesn’t always protect you.
“The reality is, if your name is still attached to the account, and your ex-spouse defaults on payments, it’s going to negatively impact your credit,” she warned.
If your ex agrees to pay off any debts, you can protect yourself by transferring the balances fully into the former partner’s name.